Everyone wants to know “has the market bottomed” ?

Everyone from financial commentators (CNBC), professional Wall Street analysts, economists, and of course let us not forget the US Government are all in disagreement over what happens next.

The very same people who in 2007 said such things as…

• The economy is in great shape
• The market will continue to go up
• The growth of foreign economies will save our economy (reference to exports)
• I don’t believe the US will enter a recession
• and the market has bottomed (said many times over the past 12 months)

…are the same people once again trying to convince the American people that the market has bottomed, the economy is stabilizing, and it is once again time to buy stocks for the long term.

If you are new to this web site you may be saying to yourself “this guy is just a bear” and decide to move along. But, for those who have been followers of ‘RebelTraders’ overs the past 18 months will know that my record speaks for itself when it comes to calling it the way it really is. And I’m going to answer the question that began this commentary.. ‘has the market bottomed’? ……. on a short term basis, maybe… long term NO.

Regardless of what type of investor or trader you are there is one primary ‘law of the market’ you must always remember. And that law is called “herd mentally”. Herd mentality simply means that people are influenced by their peers (or leaders) into believing something will happen so much that they will believe it themselves and follow the same direction, regardless of the real facts. Right now there is a growing call by many individuals who happen to appear in the press quite often that the market has bottomed and/or the economy will begin to recover in 2009. If they say it enough then people may begin to start buying into stocks again and create the appearance of a bottom in the market.

Professional traders on Wall Street refer to this constant ‘pumping’ of the market as “talking their book’. Any investor with clout in the market can begin to say how good or how bad something is in order to favor his firms trades. If I just put $10 million into a position I sure would want other people to think the same way I do. And if I was someone who frequently gets air time in the financial press/media then I would be able to talk up the market to make my position appear as the right one and hopefully develop a herd mentally. Who benefits the most from that action? The person who appeared in the media, not you. As the old saying goes in the market “sold to you“. This means that he or she had already established a position before making the sales pitch of how great something is (or will be) and then as more people begin to buy into the position the other person sells his shares. Hence the expression ’sold to you’.

I analyze the market and economy mostly by analyzing trends. It was those very trends that highlighted the troubles we were entering in 2007 and to which was spoken about very often here back then. In the stock market the analysis of charts is referred to technical analysis, to which I have studied a great deal about over the years. And from a purely technical perspective the market is at a point right now that is hanging by a thread. There are signs that a rally is in the making, but at the same time there is much uneasiness in the economy that is subduing a rally.

If you are not an individual who has studied the technical aspects of chart reading you need to know that many large money players in the market ‘do’ play the markets for short term moves based on the ‘technicals of the chart’. It can be said that technical analysis is kind of a self fulfilling prophecy. If everyone reads a chart and sees that a certain stock is sitting at a support level then it can be said that those same people may begin to pile into the trade, each carrying the stock higher until someone decides it has gone far enough and the rally ends and selling takes over.

Right now the market is still sitting above the lows of the previous bear market (S&P 500 index October 10, 2002), and from a technical perspective that has many people thinking that the market is going to be going up from here. And this would be called a ‘counter trend rally’. Because the primary trend of the market is still down (bear market) we nickname any rally a ‘bear market rally’. At this time the market is at war with itself trying to rally while at the same time people are still exiting positions and raising cash. It is at times like these when long term investors, who think the market has bottomed for good, will take large positions and hope for the best. By the way… ‘hope’ is not a trading or investing strategy, it is gambling. And when down the road the market turns against them the selling wave begins all over again. The herd mentality takes over and it builds upon itself sending the market down faster and faster.

One way to describe the market at this time is ‘dueling mentalities’ with no clear direction established yet for the coming weeks to months. Once again I must advise that my analysis still foretells a stock market which will be much lower before this is all over with. A many year bear market is clearly what is at hand and anyone who bets their life savings on a new bull market now is taking grave risks with their capital in my most honest opinion.

If a counter trend rally should develop over the next number of day, weeks, or even a few months do not get caught up in the excitement that will surely be broadcast by the mainstream media and pour money into the market on the long side. For you will be the ones that others will say “sold to you“. Sitting in ‘cash’ may be boring for some people, but it is also the least risky.

I look at numerous charts every single day. Be it charts of individual stocks, sectors, the major indices, or of economic trends. But one chart stands out very clearly and reveals just how vulnerable the economy of the United States really is. And that chart is the GDP of the  United States that is based on credit growth. A stark reminder that the economic growth of the past two decades has really been based on the growth of credit, not organic growth. Organic growth is essential for any long term viability, credit growth is simply window dressing on the economy.

I’ll have some market charts in my next post which will follow shortly…