Several Indicators Pointing to Near-Term Bottom

Since my last post, the US indices retested the October lows and just fell right through. So the scenario (ii) may be playing out. This bear market already is the worst in terms of decline velocity (except for Great Depression). The key question is whether the current bear will stabilize or deteriorate further.

I think we are very near the bottom but more downside will occur in the coming days. I will take a deep look at the financial over the next few days as financial, the weakest sector just deteriorated in a way not since the bankruptcy of Lehman. The possible collapse of Citigroup (and potentially other banks as indicated by the option markets) very similar to the downfall of Lehman and AIG seems to me more downside in the next few days.

However, I find evidence to be optimistic.

(1) the current decline is already in line with those in 1974 and 2003 in terms of decline percentage, but much shorter in duration.

(2) investor sentiment is hitting the rock bottom, as shown by the US investor stock allocation is reaching the lowest level last since 1989 and 2003.

(3) valuation is also reaching a trough level

(4) In most bottoming process, the previous strongest stocks will drop last. In this case, they are previous momentum leaders, i.e. agriculture, and solar, and also the most trusted firm. Berkshire Hathaway.

We are near the bottom at least in the near term, but the only caveat is that subtantial deleveraging may make all historical comparison irrelevant as the last time it occured in the U.S. was the Great Depression.

Short Term Pain = Long Term Gain?

The global stock market has been turning weak again since early November. Particularly interesting is the fact that among global markets, only the Dow is testing its October low while the rest of the world are 10% or more above the October lows. I postulate two scenarios:

(i) Global markets lead the US, i.e. global equity markets are trying to bottom
(ii) US market leads the rest of the globe, i.e. more downside

While the extremely oversold conditions in all equity markets indicate (i) is possible, the bottoming may take a good few weeks (if not months). Also, the technicals of a few leading stocks (fertilizer, solar in the US, some big caps like Hutchison in HK) indicate that they are heading lower, so (ii) is still a possibility.

So my trading strategy is to be near term cautious as I have time to buy if (i) is indeed happening or if (ii) is indeed the case.