Are We Nearer To A Market Bottom?

Milo Benningfield, a fee-only Certified Financial Planner in San Francisco, asks a very good question – Are we closer to the stock market bottom, now that some well-known pundits have turned bearish?

Huh? Market “experts” are worried, so we should get ready to BUY stocks?

To the novice, this may seem perverse, but some stock market observers believe that when “everyone” has become bearish, there is no one left to sell “at any price.” Therefore when “everyone” is fearful, the stock market is likely to go up. So “negative sentiment” is bullish, and vice versa, at least at the extremes (at turning points).

I am obviously delving into the dangerous area of technical analysis by even considering whether stock market sentiment can be an indicator of the future direction of prices. As far as I know, there is no independent academic research showing that this approach results in improved investors’ returns.

For most people, at most times, a buy-and-hold strategy works just fine. And when you think, “this time is different” you are just as likely to be wrong.

On the other hand, I can’t resist.  I simply find this line of thinking fascinating, so here is Benningfield’s post, Pundits Capitulating — Are We Nearer To A Market Bottom?

After months of good-faith efforts to bolster investors’ spirits, several prominent financial journalists threw in the towel this week and turned gloomy. The pundits, at least, are capitulating. Could this mean we’re closer to a market bottom?

Example 1 — Ben Stein
Back in the summer of 2007, after the first wave of the credit crisis hit, New York Times columnist Ben Stein told us the market sell-offs were “nutty,” since “This economy is extremely strong. Profits are superb. The world economy is exploding with growth.”

Over ensuing months, while acknowledging the steady stream of poor economic news, Mr. Stein continued to maintain an upbeat attitude, encouraging investors not to panic and telling them “this big, strong economy will sail on through.” That changed this week. Mr. Stein asks, “What if a slowdown is a never-ending story?” His column raises the specter of a depression, telling us, “This time it’s different . . . The problem now, as in 1929 to 1940, is that the economy is not functioning normally.”

Example 2 — Jason Zweig
Wall Street Journal columnist Jason Zweig has done a valiant job these past several months urging investors to avoid panic and to see the silver lining that has emerged with cheaper stock prices and higher expected returns.

But this week, he, too, turned to the Great Depression in his Wall Street Journal column, “1931 and 2008: Will Market History Repeat Itself?” In the gloomiest terms I’ve ever read from him, Mr. Zweig warned us:

“It is vital to realize that markets are never under some obligation to stop falling merely because they have already fallen by an ungodly amount. It also is vital to explore how bad the worst-case scenario can get and to think about how you would respond if it comes to pass.”

Example 3 — Floyd Norris
The chief financial correspondent for the New York Times, Mr. Norris has done a great job reporting on the credit crisis and, unlike many shyer souls, has been willing to stand up and be counted with his predictions for where a market bottom will likely be found. Not this week. As Mr. Norris put it in his blog, “P.S. I am following the suggestion of several commentators on this blog. I am giving up on trying to identify a market bottom.”

Market bottoms typically require a “capitulation” where the vast majority of investors finally sell most of their assets and walk away in disgust. By many measures, we’re not there yet (and may not be for months). But pundits capitulating is at least a good start.

Nice job, Milo.  I have added your blog Margin of Safety  to my list of recommended blogs.