Market Trying to Find a Bottom

09/28/2011 11:00 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Here we are again.

On September 22, 2011, the S&P hit 1,120 again. This was the low from August 8, for the low part of the August market. We had gotten as high as maybe about 100 points above that, so this is sort of the trading range at the moment.

Every time we go down to 1,120 and test it, if it holds it is a good thing. It may be a lot of volatility that we don’t like; it may scare us, but every time we test this low and we bounce off of it, it makes it more likely to hold in the future. And it gives people more of a sense of security. They say, "Oh, 1,120 is a fair price...it’s really not going to go below that."

When it gets to that level, I will buy, and the more people we can convince of that, the more likely it is to hold. And, in fact, the more likely it is that 1,120 is not going to be your bottom anymore.

Of course, you can go through it, and one of the great worries is, well, you know, we’ve still got all this potential bad news about Greece out there...Greece is going to default, everyone believes. I believe the credit-default swap market believes there’s about a 95% chance of Greece defaulting within the next five years.

So if you look at that, and you go, "OK, so 1,120 is fine as long as Greece doesn’t default," but you believe Greece is going to default next week, 1,120 is never going to hold. If you believe it is going to default in, say, 2013, 2012, 2014 that is irrelevant for the short-term low.

So that is what you are looking at right now—a market that is trying to find a bottom, a market that is really trapped not very high and not very low, there is not a whole lot of confidence. If you get up another 100 points, you see people going, "I’ll take my profits; I’ve got a 9 to 10% profit, and that is good enough in this market." So right now we are stuck in that range.

Resolving that range either on the top or the bottom is really the key to where we are going from here, and we really won’t know that until we go back and forth and back and forth a few times.

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