When Will This Market Bottom?

Today was another disheartening session where the indexes worked their way slowly lower into the close. Right now, it seems that this market is being driven by the technicals, and both good news and bad are used as a reason to sell stocks.

Sentiment was highly bearish today. The VIX surged +7%; the ISEE was near a record low at 56; and the CBOE put/call finished near 1.41. Also, the markets are now deeply oversold, making a near-term bounce more likely.

We have started to get more calls from clients concerned about the continued decline in the market, which begs the question: When will this market bottom?

In our recent Monthly Market Monitor newsletter, we looked at the last 2 recessions, and found that the lag between when the monetary and fiscal stimulus began and when it had its effect on the market was roughly a 9-10 month lag.

If we apply that to today's environment, that would put the time frame roughly around July or so. And this time around, the interest rate cuts (monetary) have been bigger and faster, and the rebate checks (fiscal) are going to be twice as big. That makes it more likey they will again work their magic on the economy, and thus the markets.

Sentiment is moving in the right direction, as we know it takes extreme levels of bearishness for the market to bottom, a contrarian signal. Unfortunately, it doesn't feel too good for the long-term investor to endure the damage in the market that is required to get to that bottom, but the payoff is worth it.

One of the positive divergences we got today was that, although the markets came down and tested their January lows, the number of stocks making new lows on the NYSE (361) paled in comparison with the January lows (1141) - a positive divergence.

Anecdotally, last week we saw several high profile CEOs trotted out in front of Congress to testify on the mortgage markets. The last time we saw these high profile congressional testimonies was in 2002, around the time of the last market bottom.

But stocks are far cheaper this time around, with relative valuations near multi-decade lows. This makes it more likely that the eventual declines will be far less than the last bear market, when we were coming off a stock bubble.

If I had to handicap the risk/reward in the current market, I would put it at 3-5% downisde risk from here, with +20-30% upside potential over the next 12-18 months. And that is pretty good odds.