It's a Market Bottom If ...


It's a Market Bottom If ...

Look for these signs.

Investors Capitulate

Big stock selloffs on huge trading volumes flush out the sellers and leave stocks in stronger hands. We've certainly had many days of sharp declines, but John Buckingham, of Al Frank Fund, notes that volumes on down days have not yet been huge.

Everyone Is Negative

Investor sentiment turns extremely negative and cash parked on the sidelines starts to pile up. Cash as a percentage of stock-market capitalization is at its highest level in decades, according to Pimco, and sentiment is certainly gloomy.

Stocks Are Supercheap

Price-earnings ratios for the market as a whole reach an extreme low, such as 12, although a single-digit P/E is an even better sign of a bottom. The P/E of Standard & Poor's 500-stock index recently stood at 14, based on analyst expectations of 2009 profits. The problem here is that it's virtually impossible to predict 2009 earnings for many companies inside the index.

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Bonds Behave

The spread in interest rates narrows between Treasury bonds and corporate bonds. That has not yet occurred, in part because credit markets are still not functioning smoothly.