At this point I am still firmly in the bear camp – a position I have been in for over 2 full years. But I am beginning to see some early signs that the very worst is behind us. This doesn’t mean the market is likely to rally soon, but it does mean there are segments of the market that could begin to lead us out of the doldrums. At this point I’d like to see a solid retest of the 7,500 level. That would create an excellent psychological barrier from which to begin a rebound. If we break decisively through that level I would remain steadfastly bearish. A break of the 7,500 (both the 2002 low and a 50% retracement of the 1980-2000 bull) would be psychologically devastating and could result in levels as low at 6,000. However, a retest would create a firm support level.
The following are potential reasons for the market to begin bottoming soon:
1) Credit spreads have improved drastically, though still elevated.
2) My expectation ratio has turned positive in the short-term although I’d prefer to see a sustained two quarter move before becoming bullish.
4) Oil has fallen 75% and appears to be basing.
5) Many foreign stock markets have fallen 70% or more and appear to be bottoming (including China).
6) The entire KBE financial ETF has a smaller market cap than Exxon Mobil (you only hear statistics like this near major market bottoms).
7) Sentiment is turning complacently bearish.
8) Housing has fallen precipitously and we are likely to begin to see the rate of decline slow.
9) President Obama will actually instill confidence in the public.
As of now I am firmly bearish, although I would likely be a buyer near the 7,500 levels for at least a trade. A strong bounce from those levels would be wildly bullish in my opinion. We’ll see how things progress….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.