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Where's the Bottom? A look back at the October 2002 bottom and the March 2009 bottom. What was being said then and what we should be looking for to help us know when the next bottom forms.

The October 2002 bottom took 31 months to arrive. Even though there was a huge washout heading into the arrival at that bottom financials and banking stocks retained much of there high valuations based on the highs set in early 2000. Unfortunately the BKX was bolstered by beginning of the housing bubble which has in great part led to the economic mess which we are currently well entrenched. A look at a long term monthly chart of the Banking Index (BKX) versus the Semiconductor Index (SOX) overlaying the Volatility Index (VIX) which is often called the FEAR Index as it can be a useful indicator of when the market is forming a bottom amid extremely high reading of the VIX as it generally falls to lower highs even as the market forms lower lows.



When the market really cratered in 2007 - 2008 leading to the market bottom in March of 2009 the cascade downward was led by financial stocks as it became clear that most home loans made leading to the 2007 high were extremely questionable in nature ultimately leading to where we are now; A country with a huge percentage of "Home Owners" underwater on their mortgages with over 16% of the available workforce actually out of work.

You will note that the NASDAQ has actually been in a Bear Market since it originally fell from its lofty perch in March of 2000. You should also note that while the BKX fell to a new low at the March 2009 bottom the NASDAQ did not. Unfortunately the SOX did. How long until we find the next major bottom?



Today the market has the kind of pessimism seen prior to the October 2002 and March 2009 bottoms. However it seems to me that since we are only 6 months from the previous market top that any rally that forms here will be short lived but who knows for sure. If the monthly charts were nearing an RSI of 30 with the kind of pessimism we are currently seeing I would be loading up buying stocks long with all my available cash. Unfortunately I don't believe this will happen for many more months.

Looking above at the monthly charts you can see where we are and where we have been.

I'd like to look back a little closer at the daily charts from October 2002 and March of 2009 and add a little of the commentary that should have helped us see those important market bottoms for what they were when they actually happened.

First the October 2002 bottom which of course did not form until the market had declined for a period of 31 months. I will use a daily six month chart of the S&P 500 overlaying the VIX. Note the importance of volume here in helping to see a bottom was forming. It starts with a single up day of higher volume upside than the previous days down volume. Market bottoms then form with a week and even then a month of higher up volume than the previous month's selling volume as you can see on the NASDAQ chart above.

Here is the October 2002 bottom:

The commentary from Briefing.com one day after the advance began.

http://www.siliconinvestor.com/readmsg.aspx?msgid=18100013

From Briefing.com: General Commentary - Yesterday we noted that the Nasdaq was probing for a bottom near 1100. Based on today's broad-based gains it looks like that floor will hold, and that the index has begun a corrective advance. How long and how far we run will depend on a variety of factors, but if we can build on the gain tomorrow the market will have taken the first steps toward changing the extremely bearish mood on the street.

It's also interesting to note that even though I believe that the Investors Intelligence Poll is the only Poll worth looking at when discussing the chance of an actual bottom forming based on its contrarian value that there were actually more bulls than bears in late September of 2002:

http://www.siliconinvestor.com/readmsg.aspx?msgid=18050079

Sentiment did not show any real surge on Friday. The VIX was up but the VXN (Nasdaq 100) was down. The put/call ratio was up, but it was not screaming. Bullish advisors edged higher to 42.2 while bearish advisors moved up to 34.5; better but not nearly where they would need to be on another bottoming attempt. All in all there is no real concern about the current state of the market or everyone getting out is already out. The latter would be nice for the long term but that is a very positive read of the action.

Calling the 2002 bottom was not easy. Looking back at some of the things I wrote then I am even embarrassed for myself. Zeev was on the Wennerstrom thread at the time projecting a bottom by October 24. It came before that but as we know he was more than close enough. Without further ado here is a chart showing the actually daily action versus the VIX of the S&P 500 in October 2002:



As far as I can tell on the retest in March neither the Investors Intelligence Poll failed to reach a reading of more bears than bulls although a cross over almost happened. In addition an analyst at Briefing.com failed to believe in the ability for the market to rally going forward:

http://www.siliconinvestor.com/readmsg.aspx?msgid=18693635

Briefing.com continues to question tech sector's relative strength given that underlying fundamentals remain soft. Recent evidence suggests that conditions will remain tough for the foreseeable future as companies hold off on IT spending due to uncertainties overseas and the sluggish domestic economy. One explanation we've given for the sector's outperformance stems from fact that 3-yr decline of over 70% has washed out most of the sellers. In other words, if you were going to sell Lucent (LU), PMC-Sierra (PMCS), Siebel Systems (SEBL), etc. there's a good chance you've already done it and moved on.

While lack of sellers may have enabled groups to hold up reasonably well over last couple of months, Briefing.com maintains that investors will need to see more consistent and compelling evidence of a demand recovery if techs are to build on their early year "success." Without growth in end-user demand, sector likely to relinquish its early leadership role.

Robert Walberg

Every major market bottom has similarities while at the same time being completely unique. They can take years to form or happen much more quickly. While I am currently looking for a 90% upside days after what could likely be more months of selling before a true long term bottom forms I will be the first to admit that if the next bottom is anything like the 2002 bottom not many of us will know it is happening until we look way back at it. RtS

How about the March 2009 bottom? A little easier to see I think yet I like most investors did not realize it was the real deal until much later. Forming a major BOTTOM is a process. It is not something that happens overnight. Just because there is ample evidence of a tremendous amount of pessimism does not mean the market cannot go lower.

For instance in 2008 bearishness hit a 5 year high of 54.4% during the last week of October. Most stocks did not BOTTOM until March of 2009 when bearishness had fallen by more than 10% to 44%. There was still a cross over of more bears than bulls but it took nearly 5 months for the BOTTOM to form. Here is the 2009 S&P 500:



The commentary at the bottom in 2009 showed the 90% upside day that ultimately should have told us that the bottom was indeed in place on March 10, 2009:

http://www.siliconinvestor.com/readmsg.aspx?msgid=25483324

Financial stocks surged 15.6% this session, providing leadership to the broader market, which had become quite oversold in recent sessions. The stock market's advance was further helped by short-covering. Still, trading volume on the NYSE climbed above 2 billion shares, which is well above recent averages, suggesting there was also some conviction behind the advance.

Roughly 97% of the companies in the S&P 500 finished with a gain. All 30 of the Dow components closed higher.

And how about the S&P 500 now?



If the market were forming a bottom like 2002 then we just saw this week a both higher volume up days and an up week than the previous days and week's selling. If we had seen a 90% upside day or two 80% upside days one might think the bottom is already in place after a mere 6 months of selling. Is it?

If it is then the bottom certainly is not as clearly defined as the one that formed in either 2002 and certainly not March of 2009.

As always just my humble opinion and as always I reserve the right to be 100% wrong as I often am.

RtS