Is the Worst Over for Stocks?

12/17/2008 11:00 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of The Aden Forecast, say some technical indicators suggest stocks have formed a major bottom and are headed higher.

The stock market dropped to another new low [last] month in what has been a brutal bear market decline. Not only has the drop been super-steep but it’s happened very fast.

The mood is dark, and it hasn’t helped that government efforts to fix the problems aren’t really helping, at least not yet. On the contrary, unemployment has become a huge concern. Jobs are being cut across the board, the numbers are now the highest in 34 years, and unemployment benefits are also at a 26-year high. The news that a recession is in full swing didn’t help matters, either.

Overall, people are scared. That’s what the stock market [has] been telling us for over a year now. Over the past year, the Dow Jones Industrial Average has suffered its worst decline since the 1930s. For those of you who remember the horrible 1974 bear market, the Dow dropped 45% at that time.

[Last] month it beat that record, plunging nearly 50% since its peak in October 2007. And it’s not only the US. The European stock market has dropped more than 50% as a whole, and the emerging markets are generally down over 60%.

Nevertheless, there were some rays of hope. After hitting their bear market low on November 20, US stocks surged following the Citigroup (NYSE: C) rescue in their biggest two-day rise since 1987. The Standard & Poor’s 500 index had its largest weekly gain since 1974.

As you know, the stock market leads. In fact, it will hit bottom and turn up way before the economy or the news improves, usually about five months before a recession ends. So, if the economy has already been in a recession for one year and the average time for a recession since 1900 is 14 months, that means stocks could start to rise at any time.

Going back to 1950, the leading (long-term) indicator [for the Standard & Poor’s 500 index] has now dropped to its lowest level in more than 58 years—even lower than it was in 1974. This alone tells us that the stock market is near a major bottom and it’s poised to rise soon, because these low levels precede significant stock market rises. The Dow Industrials is signaling the same thing, and so are all of the other US and global stock markets.

At this point, the Dow has held above its 2002 low and the 50% level of the bull market rise that started in 1982 and lasted until 2007, which comes in near 7500. If it stays above that area, it’ll be a bullish sign that a very important support level is holding. On the upside, the Dow will show positive signs by rising and staying above 8900. And if it rises above 9000 and then 9600, the much-awaited rebound rise will clearly be under way.

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