Is This The Bottom....Update #2
Since October 2008, I have been updating investors on the process of creating a market bottom and the requirements for market stabilization. In the original, I first walked through the capitulation process and the investor anxiety that accompanies the sharp downturns in the markets--we have seen much of this process at this point. Second, the market participants need to reach an "I don't care" attitude and this can come for two reasons, investors decide to stay invested because they have lost so much already; or, they decide to get out of the market because they have lost so much and can't take it any more. Finally, the market needs to become stable and over time the market can complete the bottoming process and return to a normal, less-volatile market.
At this point, we have seen capitulation and we have seen the market participants have an overwhelming sense of "I don't care" about this anymore. The stress of the daily swings and the magnitude of the volatility have become tiresome. The markets appear to be at the begining stages of the settling down process. Here we should expect that the market will slowly begin to reduce volatility over the next few months and the daily and monthly swings will diminish in size.
Over the next few months, market participants will slowly gain confidence that the market is not going to fall by 25% in one month, like it did in February of 2009; however, because of the recent history, this confidence will only be gained slowly. The "gaining confidence" process tends to be a long process because of the challenges along the way. Traders and speculators will make sure that just when everyone seems to be feeling confident, the rug will be pulled out and shaken to see if anyone will pay them to run away again.
Because of the extreme nature of this downturn and the continuing decline in the economy, we believe that this market bottoming process will take an unusually long period of time. Although the average bear market is 18 months long, this is not an average bear market. Although the average recession lasts less than two years, this is not an average recession and should last longer. This market correction and bottoming cycle will, likewise, last much longer.
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