Calling a bottom premature?

Examining previous bear markets, i've been examing how far they fell.
the 2000-2003 bear market had the S&P index went from 1527 to 800, a drop of 48%.
In the early 80s, the S&P index went from 140 to 103, a drop of 26%.
From 73 to 75, it went from 120 to 62, a drop of 48%.
from 69 to 71, it went from 108 to 72, a drop of 33%.
The drop in the beginning of the new millenium was due to the dot com bubble, and that affected a narrow segment of the market compared to the current issues. The drops in the 70s were due to high oil prices, which we're also currently experiencing.
Given the severity of previous drops and their causes, what % drop do you think will occur here, and how valid would you say this form of analysis is?
for charts of the S&P index back to 1960, see: http://stockcharts.com/charts/historical/spx1960.html
for charts of the dow index back to 1900, see:
http://stockcharts.com/charts/historical/djia1900.html

Asked by ChaosNantuko in General Market 4 months ago

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2633 points

MNSL answered 4 months ago …

I do not think any body can give predictions about the market bottom.

It all depends on the market sentiments, market players and crowd behavior etc.

Intelligent investors will add outstanding companies to their portfolios during bear market to reap maximum benefits.

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726 points

alanj answered 4 months ago …

The data that you quoted should be enough to tell you that this form of analysis is not valid. It varied from a drop of 26%-48%. This is a pretty wide difference. There just isn't any way to know what percentage the drop will be. And quite frankly is really doesn't make that much difference as long as you buy when it is close to a bottom or sell when it is close to a top.
If you want a tool that shows you when the S&P 500 is close to a short term top or bottom (especially bottom) follow the index symbol VIX (may also be written as $VIX). It's a sentimental index.
The VIX is a tool which can be used to trade the S&P 500 Index ( or an S&P 500 ETF such as SSO "long S&P 500" and SDS "short S&P 500"). The VIX is an early indicator when the S&P 500 is close to a reversal. Over the last two years when the indicator got above $30 or below $20 it could not be maintained and shortly reversed. ( It reversed quickly at the high levels. At the lower levels it takes a little bit longer to reverse) . And so did the S&P 500.( Notice that no matter which direction the VIX is trending the S&P 500 is trending in the opposite direction.) When the VIX is at an extreme high the S&P 500 is fixing to reverse and go up in price and when the VIX is at an extreme low the S&P 500 is fixing to reverse and go down in price. Use your other indicators that you use to decide when to buy or sell.

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3090 points

EthanR answered 4 months ago …

One thing you might want to do is to go back and look at previous bear markets and see what was going on when they ended. Were there any large events that precipitated the next bull market, or did it just start quietly. Second thing I would look at is what was the chart pattern when the bear markets ended. Was it a V shaped bottom, or a W shaped bottom, cup and handle, etc.

One thing is for sure, the lower the market goes from here, the LESS risk you will incur long term. I think the safest thing to do is either dollar cost average into it with ETF's, or just buy your shares with partial market orders and partial limit orders 5-10% below the current levels. You can also hedge your long positions with puts, or shorting ETF's. There are more choices now than there were back in 2002, and that is very good for the investor. One thing that is very different however, is that we now have shorting on down ticks, and that makes it easier for short sellers to push the markets lower.

Calling the actual percentage lower to the bottom is very tricky. Perhaps long term support levels on the major indexes may help you in that regard.

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198 points

helpme answered 4 months ago …

One can only tell that a bottom has occurred after it has occurred. If one thinks a bottom has ocurred, it may only be a false bottom with the major bottom occuring later. What is the purpose of knowing the bottom? Is it to stop shorting. Is it to start going long? Predicting the bottom can be disasterous if you are wrong for going long. Assuming one is shorting, ride the trend for there may be even better days ahead. What is the risk/reward?

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245 points

Dusty answered 4 months ago …

If you can tolerate my tounge-in-cheek manner, all this is really as serious as a heart attack. Each bear market had its own causes and situations. The charts only show what happened. I would reference my previous post today and say that the next best shot at a bottom IMO (no 'humble' in my world; In our Western zodiac I am a Leo, in the Chinese zodiac a Dragon) will be around Chinese New Year. Then the current mortgage mess will be starting to settle out. However, even if the Market does not fall much more after that, it may take a lot of time before anything gets significantly better. Perhaps as late as the early summer of 2012.

Where we are right now is a lull between storms or the eye of a hurricane. The Fall should repeat the Spring. After that we will be back where we are now for a long time, but the present primary financials disaster will be over. It will be interesting to see who survives. Maybe even IF there are any survivors in housing or financials and, of course, what the major players did to get through it all.

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