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When Is the Bottom <I>Really</I> the Bottom? You'll Know It When You See It

Are investors tiring of Wall Street's constantly bullish cheerleaders? They may have reason to be.

Do you remember Aesop's Fable about the little boy who cried wolf? The moral of the story is that nobody believes a liar even when he is telling the truth. Are investors beginning to feel that way about all the Wall Street strategists, pundits, analysts and technicians who keep calling the bottom to this market?

Maybe they should. The level of intellectual pretense implicit in the bullish calls that dominate Wall Street is truly staggering. No one is so prescient that he or she can predict a bottom in a stock, let alone in the market. Yet, like a bunch of false prophets who never pick the correct number in the lottery, they keep on keeping on. (Is perhaps the only thing more dangerous to your net worth right now than a congenital bear a congenital bull?)

And we are fooling ourselves if we listen to them uncritically. As much as we may want to know the future, we really need to accept that no one has a completely clear crystal ball. Sometimes you just don't know when you are at an inflection point.

Like now.

Let's review where we are to understand why it's so difficult to know where we are headed.

We are in the 18th year of the longest bull market in history. Heretofore, it has always paid to buy the dip. Stocks as a percentage of household net worth have never been higher. The U.S. economy has been a marvel of strong real growth and disinflation or low inflation. We have seen record corporate earnings growth. Stock prices and valuations have never been higher. The rising market has buoyed consumer and capital spending.

And yet, despite that great news, all the major stock indices are down this year on a series of earnings and revenue growth disappointments. First, Wall Street shot the Old Economy stocks, next the dot-coms, then the old tech and now the new tech highfliers like

Nortel Networks

(NT)

and

JDS Uniphase

(JDSU)

. The good news is that investors have not yet fled. They have instead rotated from weak sectors to strong sectors in search of superior returns. In the process, investor expectations have taken a beating.

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Now, everyone wants to know whether we have come to the end of the weak market and lowered expectations. Have we bottomed? No one knows. We are in "No Man's Land," as my colleague

Todd Harrison

calls it.

Let's ask a different question instead: How should an investor be positioned, assuming you can't know if the market has bottomed until well after the fact? Don't take a lot of risk. Real bull market rallies give you time to get in. You don't have to buy every dip.

Technical analysts Tom Beale of

Yankee Prognostics

in Cambridge, Mass., said today that he sees a range-bound market for the next six to eight months. For instance, Beale sees the tech-laden

Nasdaq 100

, as measured by the

NDX

, trading between 3000 and 3500. He sees a chance for it to rally to the end of the year but is far from certain. "The problem is that everyone still seems to want to buy the dips," he says. "That either means we will have a sluggish rally or a dramatic break below 3000."

And what if the NDX breaks below 3000?

"Who knows where the bottom then would be," Beale says with some humility. "Where was it before the run-up last year?" Around 2500.

So, next time you hear some smart guy calling the bottom, remember one thing: At the bottom, you won't believe him.