March 20, 2009
Prices continuing to repeat their pattern of declines after days of strength frustrate market watchers. These reversals upset their need to identify
the bottom turning point of the bear market that started in October 2007. Yet the significant price erosions of the past two or three weeks, on the heels of strong appreciation need not signal that recovery is not imminent.
Using the 2002 turnaround as an example -because it is the most recent recovery from a lengthy decline- permits the inference that the swing in prices is a characteristic of market turnarounds. Consider the diagram below; it shows that prices followed a similar seesaw before finally beginning their long-term growth path.
That trough had three distinctive phases, with 55 trading days between the initial low, and 104 days of further ups anddowns. Only then did prices begin their five-year long advance.
The current situation is not a precise match of the 2002 path, since 81 trading days have elapsed between the S&P500 previous bottom of 752.44 on November 20. Moreover, todays close of 768.54 remains above that low, whereas in the 2002 situation, prices were at 97 percent of the earlier low. Nevertheless, this parallel deserves attention.
DJIA -1.15 percent
NASDAQ -1.77 percent
S&P500 -1.98 percent