Four Reasons Stock Market Hasn't Reached Bottom Yet

The search of a market bottom likely will continue through the rest of the year and into 2009, as signs begin to emerge that a turning point is near but not yet upon Wall Street.

Henny Ray Abrams / AP

Market analysts have been racing to call a market bottom in recent weeks as stocks have shed more than 30 percent of their value from the highs of a year ago this month.

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But the emerging consensus is that a true bottom—and a subsequent turning point—won't happen until at least the early part of 2009.

Here are four factors cited by experts that remain in the path of a Wall Street capitulation:

The VIX

The much-cited Chicago Board Options Exchange's Volatility Index

VIX loading...

Quote  |  Chart  |  News  |  Profile

[VIX  Loading...      ()   ] skyrocketed past 80 last week, more than double the normal sign for a high level of market panic.

Since then, the VIX has eased substantially, but remains well above levels suggesting investors have calmed down and are ready to send stocks back up in an orderly, sustainable fashion.

During the credit crisis, the Dow has seen an astonishing number of days when it has finished up or down several hundred points, once swinging 1,000 points in a single day.

That doesn't bode well for a stable investing environment.

Opportunities in this market. See video at left.

"We can't have these monstrous swings up or down on a daily basis," says Richard Sparks, senior analyst at Schaeffer's Investment Research in Cincinnati. "That doesn't create any foundation for future buying and doesn't create a situation where people would want to put their money at risk."

But on the positive side, Sparks points out that the Vix on Monday closed below its 10-day moving average, which it hasn't done in a month.

"When that's happened, when it's traded a number of days above the 10-day moving average then moved below that, it's a pretty positive sign for the market," he says.

But even a low VIX doesn't necessarily mean a turnaround. The barometer stayed low for much of the market's run downward, spiking only recently during the latest wave of bad banking news and subsequent government bailout plans.

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"When the VIX gets down to about 40, which was the previous high, then that means that everyone's become complacent again," says Peter Miralles, president of Atlanta Wealth Consultants. "The question is, are they complacent for good reasons? The pendulum has swung and we're seeing high volatility. Unfortunately the volatility all came at one time toward the downside."

Credit

When the stock market began falling off its October 2007 highs, it was a precipitous drop in the banking sector that brought the major averages down.

A few months later, oil prices began to soar as a hedge against falling stocks. Soon, the two began marching in reverse lockstep--when oil prices rose, stocks fell, and vice versa.

Now it is lending rates, particularly the London Interbank Offer Rate, or Libor, that seems to have Wall Street's ear. If Libor is up, stocks are generally down, though that wasn't the case Tuesday.

Analysts say getting banks to loosen their purse strings and put money back out on the street again is pivotal towards stabilizing the stock market and the economy.

"Any kind of loosening up of the noose on the credit markets would free up individuals to do some spending, it would free up corporations to do some spending," says Rick Pendergraft, head of the Investor's Daily Edge newsletter. "If we can see a little better increase in spending both at the consumer level and the corporate level, then I think we could get a better idea of where this economy is heading for the next six months."

Miralles says the credit freeze has begun to thaw, but it's still unclear as to how long it will take stocks to benefit and how much credit concerns will continue to weigh on the economy.

"Is the second shoe going to drop as far as the economy goes?" Yes, but is it already factored into the market? That's the big question," he says. "We don't know that."

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