On Market Bottoms

By Paul Goodwin, ChiefAnalyst, Cabot China & Emerging Markets Report
From Cabot Wealth Advisory

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Stock markets go down because people don't feel like owning stocks. They're worried that subprime debt will wreck the credit business and that there's going to be a recession. They fret that declining house prices will dampen consumer spending, which will lead to an earnings implosion in retail. Whatever the rationalization behind it, they're afraid they're going to lose money, and owning stock makes them so nervous that they can't sleep at night.  

Fair enough.

So people (and institutions) sell stocks and markets go down. And they pick up momentum on the way down as people see that prices are falling and jump on the selling bandwagon.  

They keep on going until the last diehard, the last hold-out, the most stubborn growth investor in the world finally gives up and sells out. That's the bottom.

Now, obviously, people still own stock, because every time someone sold, someone else had to buy. But at the bottom, people are either content to hold stocks because they got them so cheap or they're so discouraged that they don't even have the energy to sell. It's the long, dark night of the investor's soul, the moment of greatest despair.

It's also the point at which stocks start to go up. That's what a bottom is.  

Nobody knows when a bottom is reached; that's something you can only see in the rear-view mirror. But there can be lots of clues that a bottom-building process is taking place.

I like to think about market bottoms like I think about the coming of spring in New England. Spring doesn't wait for the snow in my front yard to melt and then arrive. Weeks before we get the robins in the back yard and the sap rising in the sugar maples and the potholes appearing in the roads (spring isn't an unmixed blessing up here), the snowdrops, little white flowers that will about three inches high, are already pushing their leaves up through the thinning edges of the snowpile. That's spring on the way, even if the snowplow doesn't know it.

The moment of greatest discouragement with the snow, slush, grey skies and frigid winds of winter is precisely when spring begins.  

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