Market Bottom? Why we're there (and why we aren't)

Today (Monday) was almost another one of those days—a 7% down day mini-crash that should be followed by a big Tuesday upswing. But instead the market jumped the gun and had Tuesday's day at the end of Monday, removing the opportunity for upside gain in this bear market.

But Monday's action also brought out some other thoughts. The first being bandied about is: are we at the bear market bottom? The selling was brisk at times, and the S&P 500 was down over 8%. Then the market recovered, which to some is a sign of a turnaround, and to others a sign that true capitulation was not reached.

Here are my two best reasons why we might be at the bottom:

1. The market dived down, a lot, and recovered. That's one sign of capitulation. The fact that the market turned around the same day isn't bad—it happens a lot at bottoms. For a turnaround to be BAD bad, the market would have to have plunged about 15% and almost fully recovered. Had that happened, it would have strengthed the case for Dow 3,500. If the market had stayed down 8%, it would have been interesting to see tomorrow's action. But in any case, today's action had the look of a (temporary) market bottom.
2. Jim Cramer told everyone to sell today. Cramer is the stock guru du jour, and it invariably happens that these gurus make one really bad call, going bearish at just the wrong moment. A few months ago when he called the bottom incorrectly, it was obvious that things were just getting started on the downside. But this one is a clear reverse play. I wasn't even considering today as the bear market bottom until I read about Cramer's call. Technically he didn't say "sell all stocks" but he said "don't have anything in the market that you'll need for the next five years" which is all but saying things are going to crash, a la Joe Granville in 1982 and Elaine Garzarelli in 1996. After those two made their call, the market exploded upward instantly and forcefully for the next several months. The resultant bull markets lasted years and were the biggest of the post-Depression era.

Now for reasons why we haven't reached the bottom:

1. As stated above, today's action looks like a temporary bottom. In other words the next few weeks/months might actually be good. But in an environment like this, I'd expect at least a double bottom to happen. And after (/if) stocks rise for a few months, they will likely come back down and at least test these low values, if not crash right through them.
2. The market is just beginning to sort out the credit mess. Normally this wouldn't be a problem for the stock market—it tends to climb when things are at their worst. And the credit mess has gotten as bad as it is going to get. From now on, whatever happens is just "more of the same"; after the fall of Lehman Brothers, Fannie and Freddie, and several big banks, it would take a lot to shock the market again, and today people pretty much took in stride that Europe and Asia are going to the toilet. So the market is free to start climbing again, inexplicable, concerning the credit crunch. BUT, the reality of the recession has not hit the market yet. The market can't hit bottom until the recession is announced. At that point, the recession will probably be over, or very close, and that's when the turnaround will actually begin. It will seem counterintuitive to everyone, but that's what usually occurs. Right now though, most people seem to think the recession is "coming" or even, that it will be avoided due to the bailout plan.
   
   These people I refer to Jim Jubak, another modern market guru who is more measured and less bombastic than Jim Cramer. He calmly states that he underestimated the economic effect of the housing/credit crisis, and that things are going to get worse. Coming on the same day as Cramer makes this look like a double shot of wrong-timed gurus, and the next few weeks or months may make it look so. But ultimately the economy nationwide hasn't even felt the effects that the credit crisis will wreak. Jubak is right.
   

That's my analysis. Temporary recovery will occur because everyone is down on the market, so much so that everyone who wanted to sell based on today's viewpoint has already sold. The next few months probably will be good. But in the longer run the market will continue to fall. Next year will be bad. And it will turn around only when the recession is announced, which will probably coincide with the housing market finally hitting bottom.

Whether it drops all the way to the projected double-top low, who knows. But it's still in play. Don't be fooled by the next few months of stock market recovery should it happen; all that will probably be given back just as fast as it arrived.