Signs of a Market Bottom
Charles B. Carlson, CFA
Contributing Editor, Dow Theory Forecasts
The market’s recent weakness is causing a lot of investors to wonder how much more pain is ahead. Quite frankly, nobody knows for sure when markets bottom. However, one tell-tale sign of a market bottom that has yet to occur is the complete capitulation on the part of investors.
What do I mean by capitulation? Wholesale selling of all securities, not just those in certain groups.
Up to this point, what we have seen is more a rotation of money out of one group and into other sectors. For example, the technology sector has been hit with a lot of selling over the last few months. However, tech money has been finding its way into other areas, notably consumer and drug stocks.
At a market bottom, however, there are no places to hide. Investors will sell all stock and keep the proceeds on the sideline.
It is when investors move to the sidelines en masse that market bottoms usually form.
What would be a sign that the market is nearing a washout phase? One sign would be 90% or more of the 30 components in the Dow declining in a single day.
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