When Will the Bear Market End?

09/18/2008 12:00 am EST

Focus: MARKETS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Strategic Advantage, tells how to spot a possible market bottom.

The very best time to start applying cash to the stock market is six to nine months ahead of the end of recession. That is, bear markets usually end when economic news is still bad and then gather strength by climbing the proverbial "wall of worry" as the economy starts to slowly and imperfectly improve from low levels.

It's a tricky matter, and investors lose a lot of money trying to guess the starting points of recessions, then extrapolating a potential end point, and then finally estimating where the middle is.

The antidote to all this guessing is to focus single-mindedly on the demand and supply balance for stocks rather than on the thousands of inputs and outputs of the economy. And right now, the bad news is that the demand for stocks continues to weaken and the supply provided by sellers continues to grow.

Buying power as measured by pricing and volume statistics has been falling since mid-August and is now just barely above the levels of the mid-July low. Meanwhile, selling pressure is already well above its mid-July levels, which indicates that investors are just as anxious to dump shares now as they were when the Standard & Poor’s 500 index made its midsummer low.

Selling alone does not make a bottom. There must also be evidence of widespread, rapid, "panicky" buying. The only thing that can cure and end a bear market is a new belief on the part of a very broad swath of investors that prices have reached truly rock-bottom levels, and that if they don't buy now they will miss the deals of a decade. To signal this, we need at least one day in which 90% of prices and volume are to the up side. None have occurred in the past year despite several sessions in which the Dow Jones Industrial Average has risen more than 300 points.

Until this happens, there will be more panic selling sessions. So, let's just keep our powder dry, lots of our potentially investable funds in cash, and wait for a clearer signal that the worst of the bear market is over and it's time to start taking risks buying stocks with clarity and confidence again.

I don't know if it will occur next week, next month or next year—and frankly, neither does anyone else. It may not be much fun, but that's the way it is. As my father used to say, "time is God's way of making sure everything doesn't happen at once."

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