Thursday, January 22, 2009

Is this really The Bottom?

Yesterday, at the advice of Eric and direction of Teresa Lo,  I have re-read the seminal tome  Nature of Risk by Justin Mamis and his discussion about recognizing market bottoms by looking at the number of new lows.  Mamis' thesis is that the market sends messages before any trader or investor can notice, and we only know why the market recovered after the fact.

His graph depicts the "typical bottom" with the psychological stages that market participants experience.

Now let's look at today's market:

I have drawn in the representative stages as if we have already hit the bottom and are now poised for a recovery.  Of course, my opinion is next to worthless but I have great trepidation about calling the recent blip downward Stage E since it did not feel like "aversion" with everything being sold off en masse as is typical of a true bottom.

Teresa Lo gives daily barometers of market internals on her proprietary site and she is showing that the new lows have not dropped sufficiently and have actually shown a little increase which is inconsistent with Mamis' observations of a market low.  He states on p.143: "A diminishing number of new lows as [the index] chalks up a lower low is a divergence telling us about an impending market bottom."  This has not happened yet.

Mamis' review of how to spot a market bottom:

Next up: what Mamis would say to buy when the market turns...

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