A Market Bottom?

| January 11, 2008

“When do we hit bottom?” The question seems to be on everyone’s mind these days. Some Investors have very strange ways of identifying market tops and bottoms.

One popular investor listens to his mother. When she calls asking “is now the time to buy” . . . he knows it’s time to sell. If his mother wants to sell we know we’re at a bottom. Another fund manager, who will go unnamed, mentioned to me that he listens to his barber. Again, doing the exact opposite of what his barber suggests.

These indicators seem a bit funny to me. The market has fallen nearly 10% in the last few weeks. I’ve been watching the news very closely looking for signs that we’re near a market bottom. We’re close, and here’s why.

First, consolidation can be a sign of a bottom.

News of Bank of America (BAC) buying Countrywide Financial (CFC) has helped support the financial industry. The beaten down airline industry moved higher this week after Delta’s announcement. They’ve decided to seek approval to start merger discussions with United and Northwest.

What is happening here? The companies have become so beaten down competition sees value that is hard to pass up. This is Darwin’s theory at its best in the economy. The strong companies make themselves stronger by buying up weaker companies. The prices are too good to pass up.

Second, watch closely when stocks move against the news.

Macy’s (M) announced that sales fell 7.9% in December.  To add fuel to the fire, they also said January sales will be down 4%.  JC Penney (JCP) announced December same store sales were down 7.5% and year-end earnings would be at the low end of the range.  To top it off, Nordstrom (JWN) announced December same store sales were down 4%

On the day of these announcements Macy’s stock closed down a few pennies.  JP Penney was up more than 4% and Nordstrom was up 3%. I don’t know about you, but that’s not quite the reaction I was expecting.

When stocks announce bad news and move up, many perceive this as a sign of the bottom.  The thinking is that all of the bad news is in the stock.  Investors have anticipated this announcement and are now focusing more on the future.

Third, and last, when the fed aggressively lowers rates we are near a bottom.

We watched this happen in 2001 and 2002 as Greenspan aggressively cut rates to stimulate the economy.  We’re seeing a repeat of this move today.  Current Federal Reserve Chairman, Ben “save the economy” Bernanke announced that he would take substantial action to support the economy.

Rumors started to swirl that the expected ¼ point rate cut may become a half-point cut.  We will know for sure on January 30.  No matter what happens, stimulus like this is not to be ignored.

Independently the three indicators don’t seem like much. When taken together I think they signal a bottom.

I will continue watching the markets closely over the next two weeks. If they move higher, I will know these signals are confirmed.  Profiting from a move off of a market low can be as simple as taking positions in the traditional market leaders.  In my mind, that includes technology companies like Microsoft, Cisco, and Intel.

Once the market signals this bottom, profits can also be had by buying call options on the major indexes like the Nasdaq 100 (QQQQ).

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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