Picking a Market Bottom: Why the Pros Are All Wrong
Picking a stock market bottom during the past year of mayhem has been like playing a game where nobody ever wins.
Some of the smartest minds on both Wall Street and Washington have tried numerous times to identify an ultimate low for stocks and have failed—in some cases miserably.
The bookend collapses of both Bear Stearns and Lehman Brothers served in the minds of some as critical points of capitulation. For others, the "bottom" was election-related. Still others tied their bottom calls to various legislative developments.
So far such pronouncements have had one thing in common: They have all been wrong.
But how could so many people have misread the market so dramatically?
"Smart people tend to look at history, and history would have mitigated against such a decline," says Uri Landesman, head of global growth strategies at ING Investment Management in New York. "People felt various support levels would hold. With every support level collapsing, the confidence that the next level will hold wanes."
With the Dow hovering in the 6,500 range some experts are again looking for a bottom.
But consider some events of the past year:
- 2008 kicks off with legendary prognosticator Abby Joseph Cohen of Goldman Sachs calling for a 14,750 Dow.
- As stocks struggle through the early part of the year, many analysts think the March 17 demise of Bear signals the turning point in the bear market. The Dow closes at 11,972 and a subsequent CNBC.com poll finds more than one-third of respondents embracing the "Bear Stearns bottom."
- On June 20, Merrill Lynch analyst Ed Najarian says bank stocks are in "capitulation mode" suggesting that a full-scale selloff was in the works, well before the worst of the carnage in financials. The Dow closes at 11,842.
- July 8 sees market strategist Byron Wien say the market is in the process of bottoming and will be stronger by year's end. The Dow is at 11,225, a number that looks staggering now. A week previous, CNBC.com asks readers in a poll whether the Dow will finish the year at 10,000, 12,000 or 14,000.
- On Sept. 23, eight days after Lehman's fall, BlackRock's Bob Doll says the worst may be over for the market and signs of capitulation are appearing. The Dow is at 11,015.
- On Oct. 10, Art Hogan of Jefferies calls the renowned "Hogan Bottom" on CNBC. The Dow closes at 8,451 following a stunningly volatile day of trading. See the video on the next page of Hogan's original call of the market bottom.
- On Nov. 11 Doll says the "market is going to take time to make a bottom. It's going to be over a period of months." The Dow teeters at 8,854 and is just four days away from making a temporary bottom that lasts until Feb. 19.
And there are more—plenty more—where those came from.
Yes, it's easy to pick on those who saw a bottom coming and were wrong, but the truth is that only a handful of experts envisioned the depth of the damage, and almost none anticipated the violent reactions the market would have when the government tried to get involved.
"The economy has continued deteriorating, whereas most people, myself included, had expected it to start stabilizing by now," says Gary Flam, portfolio manger at Bel Air Investment Advisors in Los Angeles. "Given there's no stabilization in the economy, people don't know where earnings are going to go. It's a huge moving target as to what you are using to stay stocks are cheap."
WHAT WILL MAKE STOCKS STABILIZE?
Do a Google search for "capitulation" on CNBC.com over the past year and you get 256 hits, some of them, to be sure, stories like the June 30 piece quoting UBS stocks guru Art Cashin saying that capitulation has not yet materialized.
But Cashin and others who have avoided the term seem to be edging closer to it lately.
"The first time I used ('capitulation') was Monday," Landesman says. "I used it because I was starting to hear from retail investors that they were stepping in and selling. They couldn't stand their account going to zero and they needed something to happen.
"I felt that was a good sign. When the retail guy capitulates you start getting near the bottom. Will it be 650 (on the S&P 500) that holds it? Will it be 600? Who knows?"
While the November lows may well have held, investors got shaken this year when government leaders failed to articulate clear plans to solve the economic crisis.
"People expected a real Obama rally," Landemsan says. "They thought he'd come in and bring a real wellspring of hope and that just didn't happen."
Indeed, investors can be forgiven nowadays if they cringe when they hear another expert talk about a market bottom.
But there have been plenty of investment pros over the last year who have avoided such talk.
Richard Sparks, senior analyst at Schaeffer's Investment Research, has assiduously steered clear of capitulation chatter no matter how bad the market has gotten, consistently reasoning that he has not seen the despair required for a bottoming point.
"I don't think we're out of the woods yet with respect to the volatility and the downtrend that we've seen," Sparks told CNBC.com on Oct. 21 when the Dow closed at 9,045. "We can't look out ahead and see much light on the horizon."
That light, many analysts now agree, will only begin to shine when the economy stabilizes--not necessarily grows, but at least no longer sees the precipitous declines that come with the daily data points.
"If things stop getting worse in the economy and the economy stabilizes a bit, stocks will stabilize," Flam says. "To a certain extent that's got to be led by financials. Given the importance of the banking system to the economy, as long as the banks continue to deteriorate I think it's going to be hard for the market and economy to stabilize."
At that point, where unemployment and housing prices halt their declines, it could provide an all-clear moment for experts to start looking for a true market bottom.
"Any stability would be seen as hugely positive. If people really thought the economy had bottomed you'd see an enormous rally," Landesman says. "If people can make the call they're going to be stepping in and buying stocks."