JMJ I hope so...
MARK HULBERT
Has the bottom been seen?
Commentary: Monday may have marked end of the correction
By Mark Hulbert, MarketWatch
Last update: 12:00 a.m. EDT March 12, 2008
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ANNANDALE, Va. (MarketWatch) -- Did Monday mark the bottom of the stock market's correction that began last fall?
Tuesday's explosive rally surely gives ammunition to those who say, "Yes." By rallying more than 400 points, the Dow Jones Industrial Average
$INDU 12,110.24, -46.57, -0.4%) on Tuesday turned in the biggest percentage gain in over five years. Read full story
But this correction has seen explosive rallies before that turned out not to mark the final bottom. So it behooves us to dig deeper.
I turn first to investment newsletter sentiment. A contrarian analysis of that data supports the notion that Monday was the end of the correction, since in recent sessions enough editors have turned bearish -- in effect throwing in the towel.
Consider the latest readings of the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock market exposure among a subset of several dozen short-term market timing newsletters tracked by the Hulbert Financial Digest. At minus 22.5%, the HSNSI is even lower than it was at the beginning of last week, when I had already concluded that the market was close to a bottom. See March 4 column
In fact, the HSNSI is now lower than it has been since October 2005, some two and one-half years ago. This is a big contrast to the sentiment situation that existed at the Jan. 22 market low, when the editor of the average market-timing newsletter wasn't even as bearish as he was during the market's corrections of last summer and fall.
Technical support for the idea that the correction's bottom has been seen comes from the market's diminished trading volume in recent weeks. Bob Brinker, editor of Bob Brinker's Marketimer, the newsletter with one of the best market-timing records over the last two decades, explained why in the March issue of his newsletter, published earlier this month:
"The process of establishing a stock market correction bottom has unfolded in text-book fashion over the past two months. This process involves the establishment of an initial closing low, followed by a short-term rally, followed by testing of the area of the prior established closing low on reduced trading volume ... The correction bottoming process (over the past few weeks) has seen a significant reduction in selling pressure in the vicinity of the Jan. 22 closing low. This is a very important aspect of any successful test."
Yet another perspective, which also supports the notion that a bottom of at least some import has been registered, comes from Richard Russell, editor of Dow Theory Letters. Though Russell is officially bearish on the stock market's primary trend, he has noted in recent weeks a potentially bullish non-confirmation in the refusal of the Dow Jones Transportation Average
$TRAN 4,525.34, -74.23, -1.6%) to join the Dow in breaking its January low.
Writing before the close on Tuesday, Russell wrote that, at Monday's close, "The market was severely oversold. But what interested me was that the market was not only oversold -- but it was severely oversold in the face of a flagrant non-confirmation on the part of the Transports. This unusually bullish combination provided the basis for a violent turnaround. In fact, it could turn out to be more than 'just a turnaround.' Ideally, what I'd like to see now is a 90% day on the upside. If that were to occur, we could be seeing a key reversal -- with the stock market perhaps having discounted the worst that can be seen ahead."
By the close on Tuesday, Russell's wish for a 90% up day apparently was granted: Up volume on the NYSE represented almost precisely 90% of the combined up and down volume on the exchange. |
