Bottoming is Hard

When the markets go up and it dips a little, it’s very easy to bottom and charge higher. It’s also very easy to rip higher on good news, a Fed comment or something to do about Chinese growth. However, after suffering the sort of train wreck we just went through, it’s extremely hard to bottom out and head higher.

For one, all of the bears are pressing their luck, betting against the same names. And two, the overhead resistance is absurd, since margin levels were so high prior to the drop. Often times the bottom is found when the last bull, guys like me, give up and cry in the shower, lamenting over the mistakes made.

After the market bottoms, no one will know it. The bears will continue to short stocks, thinking we’ll retest the lows. We might even do that and it will be ugly. There will be an awfully large wall of worry to climb, all to do with valuation and how the economy cannot support such high multiple stocks, yadda, yadda, yaddda. Then we’ll get a few break out days, again leaving the bears in disbelief.

Then the big one will come, effectively alerting the bears to the fact that the market is on its way up again. By this point, all of the scared money will come racing back, hoping to capture some easy gains. Simultaneously, short sellers will provide the tinder for the fires, by covering their shorts. So you’ll get natural buyers and short covering, a recipe for a massive melt up.

But before any of that can happen, we need a foundation.

Naturally, this time might be different and perhaps the market is smart this time around, telling us something about the economy that we don’t already know. I am just laying out the most likely scenario, based upon my time in the market.

Looking at the market now, I am not happy with the action. It’s rocking back and forth between gains and losses, a bad idea when you have technical damage and people who have forced liquidations coming up.