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Traders: What The "L" Is Going On?

"We haven't been this oversold since tomorrow."

That line, heard on trading desks all over town late this afternoon, is indicative of the market fatigue that has set in.

What do I mean by market fatigue?

I mean that:

1) We go down for 3 weeks and cannot even sustain a two-day rally.

2) Any modest move off lows is met with immediate selling within a day. Example: Dow Transports DOWN 7 percent today, UP 5 percent yesterday...stocks like Overseas Shipping UP 12 percent yesterday, DOWN 12 percent today...Con-Way UP 10 percent yesterday, DOWN 7 percent today.

3) Even Congress is getting exhausted. Rep. Barney Frank said today that there was a general sense of fatigue in helping U.S. automakers.

What's the problem? For stocks, it's simple: you cannot have a Price without an Earnings target. Stocks move as a multiple of earnings.

Top-down strategists have been hopeful that some of the earnings this year would be back-end loaded; that is, that there would be an improvement in the earnings outlook in the second half. That hope is now dissipating, so they are taking down earnings projections.

To where?

Right now, many strategists have earnings estimates for the S&P 500 in the $50 range. What multiple should be assigned to this figure? That's debatable, but 10 to 12 times is reasonable. Let's assume 12: $50 x 12 = 600 on the S&P 500 for a bottom.

We closed today at 682.

So let's get there and be done with it! It's not that simple. Many traders feel we can reach a bottom in a month or so; the problem is, when does a recovery begin?

The bears see a "long L"; that is, they see a bottom coming but then moving along that bottom for months to come, with an occasional rally that falters.

This makes traders who are trying to pick a bottom less enthusiastic, since it implies they may have to wait a long time to make money.

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Questions? Comments? tradertalk@cnbc.com

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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