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What a Stock Market Bottom Really Looks Like

Thursday, 23 Oct 2008 10:35 AM

In an article that I wrote two weeks ago entitled “The Fear is Here: Almost Time to Buy,” I said that my research indicated that stocks were very near a bottom.

Two days later, on Oct. 10, both the Dow Jones Industrial Average and S&P 500 Index fell to their lowest level since March 2003. Since then, stocks have traded essentially sideways, with stock market volatility increasing dramatically.

As you can see in the first chart below, stock prices tend to trend lower whenever stock market volatility increases for a period of several weeks and to trend higher when stock market volatility declines for several weeks.


Click for Larger Image

More importantly, stock market volatility tends to increase dramatically near major turning points in the equities market, as a tug of war develops between stock market bulls and bears, and investors try to determine the future direction of stocks.


Click for Larger Image

That’s exactly what’s occurred over the past couple of weeks, with stock market volatility rising to the highest level since Bloomberg L.P. began providing volatility data in 1990.

Meanwhile, an overwhelming number of investor sentiment indicators suggest that most investors that were considering exiting the equity markets have likely already done so and that few potential sellers therefore exist to push stocks substantially lower.

I therefore expect stocks to begin trending higher within the next couple of weeks.

However, my models indicate that stock prices in general will likely continue to be quite volatile between now and the end of the presidential election on Nov. 4.

Click here if you’d like to read more on my analysis of the financial markets with a free trial subscription to my investment newsletter, The ETF Strategist.

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DavidFrazier
In an article that I wrote two weeks ago entitled “The Fear is Here: Almost Time to Buy,” I said that my research indicated that stocks were very near a bottom. Two days later, on Oct. 10, both the Dow Jones Industrial Average and S&P 500 Index fell to their lowest level...
david,frazier
286
2008-35-23
Thursday, 23 Oct 2008 10:35 AM
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