Vigilant Investments Advisors, LLC.

Is This The Bottom - Update 1

As of October 9, 2008 I had received continued questions from people searching for a conformation of a bottom to the stock market declines and I wrote about the need to be patient and wait for the market to complete the cycle that would indicate a bottom.  As the question continues to loom, what follows is an updated answer to this continuing question.

The bottoming process for the stock market requires that the core, long-term market participants decide to either (a) get out of the market because they have lost too much and they just can’t deal with the pain any more and they just don’t care anymore; or, (b) stay in the market because they have lost so much and they just don’t care anymore.  This feeling of “I just don’t care anymore” is what needs to prevail in order for time to reduce the volatility, for the market moves to be taken off the front page of the newspapers and for market participants to begin the long process of healing.

It is clear that the market is in a healing process.  The rapid declines of October, November and December have passed, the New Year is here, the new administration has been sworn in and the bailout programs are beginning.  As some investors rush to determine that the bottom is now in, there is still room for caution.

Generally, the market will form a bottom roughly six to nine months prior to any turn in the economy.  Market consensus is that the economy will turn during the latter half of 2009 and investors are hoping that this indicates that the bottom of the market is in place.

Unfortunately in the case of this market bottom, the depth of the economic slowdown is and will continue to be longer and more painful than we have experienced in the past.  Therefore, the bottoming process that the market must complete should also be longer and more painful than we have experienced in the past.

If this correlation is true, we should expect to see the bottoming process continue for an extended period of time, possibly continuing into the latter half of 2009.  This would mean that the market would not appreciate significantly for many months.  In addition, during the next few months, there continues to be a reasonable risk that the loss of jobs, corporate cutbacks and international recession will continue to drag on the market and we could see the market deteriorate further.

In a market that has a limited amount of upside growth and a reasonable risk of downside deterioration, investors should be protective and cautious.  Traders will continue to quickly trade in after down days and will quickly sell out after up days; but, investors will find better risk versus reward opportunities in investments that are designed to do well in a more moderate environment.