Is True Bottom Awaiting Far More Pain and Disbelief? ~ The Risk Averse Alert

Tuesday, April 07, 2009

Is True Bottom Awaiting Far More Pain and Disbelief?

Continuing on the "Sell in May and Go Away" theme, let's take a closer look at a fitting possibility unlike anything I have thus far presented...

Up to now the assumption has been the market might be poised to recover much of its losses suffered during last year's September - October rout. But what if this simply proves too optimistic?

What if time is at hand for the world to grow thoroughly distrustful of bottom pickers? What if last year's losses are to be merely consolidated during the present period ... this in preparation for a final plunge lower to true bottom lying considerably below last month's low ... somewhere in the vicinity where indexes last traded in 1994? And what if true bottom is to be reached later this year or sometime next ... rather than be delayed for another couple years after?

SPX weekly

Even in the realm of this possibility there still appears a good bit of upside potential remaining here. Indeed, the S&P 500 could rise from here to somewhere near 1000, and still be poised to come undone fairly rapidly, as wisdom suggests possible.

Trouble is, though, the index soon could hit a brick wall well-short of 1000. In fact, consolidation of last year's losses could even develop with a downward bias. Something like 2004 and 2005 (when gains made during 2003 were consolidated) ... but in reverse. This more or less was the essence of Monday's analysis when I concluded, "Anticipated price form unfolding in the present period might likely differ to some degree from earlier this decade."


Flip a coin! Is 1000 in the cards? Or might the market soon turn over ... setting another "nominal," new, post-October 2007 low ... only to bounce like a champion yet again thereafter?

What I know is this. It's 2009, not 2001. The market's dive lower up to this point has been far more volatile than earlier this decade. And the trend is your friend. These things I know.

Likewise, the market continues holding up rather well, much as expected. So far, then, it appears gains made since last month's bottom simply are being consolidated. Furthermore, this is occurring in a trading range having an upward bias. The S&P 500 might very well be preparing for a rendezvous with 1000.

Or not.

Either way, sell in May and go away is on the radar. A move straight up between now and then would be desirable, if only for the sake of clarity. Bottom line, chances are by the end of the year those calling March '09 "the" bottom probably will find their positions challenged.

My apology if this first-sight of a potentially pending turn lower in the market seems a U-turn in my thinking. It's really not. Nor is anything about its likelihood set in stone. Rather, its probability is largely raised by this year's terrible start and a sudden wave of bottom callers (among whom are Morningstar and the Motley Fool, whose typical, risk-oblivious message coming at this time I find rather unwelcome and, indeed, dangerous).

Just days ago I thought March bottom would hold for awhile. Right now, though, I am not nearly as certain.

Fast Money
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