Wall Street is still bullish after the Dow Jones Industrial Average’s DJIA,
A 500+ point drop on Wednesday following the Federal Reserve’s latest meeting and rate hike.
Consider all the attention given to the potential “double bottom”. By framing the market’s weakness this way, the bulls are trying to put a positive spin on the market’s decline – which has already lost 12% to the S&P 500 SPX,
Since the mid-August high and a 15% discount from the Nasdaq Composite comp,
A double bottom occurs when the market makes an initial low, rallies briefly, later reverts to that initial low but does not drop significantly lower, and then begins a major new phase. It will certainly be good news if the market follows this script. But there’s no way to know in advance.
There are telling comments about double bottoms made by biblical authors Robert Edwards and John Magee on technical analysis entitled “Technical Analysis of Stock Trends”. They write that double bottoms (along with double tops, the bull market functional equivalent) are referred to by name “perhaps more often than any other chart pattern by traders who have a grip of technical ‘lingo’, But there is little organized knowledge of technical facts … . [True] Double bottoms are very rare… and true patterns can rarely be detected positively unless prices move far enough away from them. They cannot be predicted from chart data alone, or they cannot be identified as soon as they occur.”
Given this, the recent focus on double bottoms shows that we are still moving through the five stages of bear market grief that I have discussed earlier – denial, anger, bargaining, depression. and acceptance. The celebration of the market decline as a bullish double-bottom formation was established shows that we are not past the “bargaining” phase – depression and acceptance are still to come.
As Edwards and Magee point out, the construction of the chart alone is of little help in telling whether a second wave of the market will end at the same level as its initial decline. But are there non-chart factors that give us valuable straws in the air? To gain insight, I reached out to Hayes Martin (president of advisory firm Market Extreme) and David Aronson (a statistician who has written several books on how to base your investment decisions on a sound statistical basis, including: Evidence Based Technical Analysis,
On the one hand, both told me, the factors that indicate a healthy or ailing market are the same today as they are at any other time. For example, an extreme in bearish sentiment is a good sign that a decline may soon give way to at least some sort of rally, regardless of when. Martin says there is currently a significant amount of bearishness among investors and advisors, but he wouldn’t expect a major downside unless there is “a further increase in negative sentiment.”
It sums up the absence of investor dedication with my column earlier this week — the widespread disappointment that prompts investors to throw in the towel and swear off equities outright.
On the other hand, Aronson said, there are factors that need attention, which are unique to the market landing in its first bottom zone. For example, during that second downtrend it will be bullish if there are significant variations in the behavior of different market segments and market averages. This occurs when only certain sectors and averages fall below their initial lows, but others remain well above.
So far, Martin says, only a “modest” amount of such deviation has developed. Coupled with the absence of a spike in negative sentiment, it is too early to predict that the market’s decline will end around June lows.
Things may change in the coming days, as the market conditions are changing rapidly. If significant divergences emerge, with an increase in negative sentiment, “the bottom will be all the more powerful,” according to Martin. In the meantime, don’t jump the gun.
Mark Hulbert is a regular contributor to MarketWatch. Their Hulbert Ratings track investment newsletters that pay a flat fee to be audited. he can be reached here [email protected]
More: Stock buyers still very excited for the end of the bear market
Ray Dalio says further fall in stocks, bonds, US recession is coming in 2023 or 2024
Credit: www.marketwatch.com /