Has the Market Bottomed?
Dec 7, 2008
Posted by Jody Eisenman | Filed under Uncategorized
There is lots of speculation on the financial networks as to whether a bottom has been made in the stock market. Of course, a lot of these commentators have a vested interest in seeing this; their ratings are higher in bull markets! Although the market is still down for the month of December; it is only fractionally so. Could we have reached at least a temporary bottom? Lets examine the pros and cons:
Pros:
1. At least we seemed to have stopped our free fall.
2. The financial stocks which led the market down have made some nice upside moves off their lows. Here are some examples:
Stock Low Current
Citicorp 3.05 7.71
Morgan Stanley 6.71 15.72
Goldman Sachs 47.41 70.72
General Electric 12.58 17.85
3. The market has fallen so hard so quickly, we are simply oversold.
4. The market has seemed to have shrugged off extremely negative economic news.
Cons:
1. Yes, we may have stopped our free fall, but it’s been a relatively short period. In addition, the volatility is still extremely high. Does anyone think we still can’t see another 500-700 point daily move? Historically, bottoms are not made until we have based for at least a few months. Clearly, this hasn’t happened yet.
2. Yes, the financial stocks have come off their lows but they are still very far from where they were a year ago. In addition, thanks to a combination of TARP money, balance sheet deterioration and the conversion of several firms to bank holding companies, these companies no longer exist in their previous forms. There is no reason to believe that these companies will ever come close to seeing their previous valuations anytime in the near future, probably years. This move may be nothing more than short covering.
3. We have fallen quickly. However, the economic situation has deteriorated faster then at any time in our nations’ history. We have gone, in about a year and a half, from incredibly free credit to incredibly tight credit. Several large firms have gone under or been taken over to avoid bankruptcy. Many others are closing in rapidly. The auto industry, once the pride of the US, needs a major bailout. Floating new bonds have become nearly impossible without government backing. Therefore, the selloff, while dramatic, is justified considering deteriorating economy.
