Finding the bottom of something isn’t always difficult. If you fall off a cliff, you’ll know when you hit the bottom of the valley.

When you get that slurping sound with your straw, you know you’ve hit the bottom of a soda can.

But how do you know when you’ve hit bottom in a stock market?

“To try to pick the bottom is unwise,” said Jeffrey Hirsch, editor of the Stock Trader’s Almanac.

That hasn’t stopped lots of investors from trying. They look at technical signs like 200-day moving averages. Or a volatility index that has been hovering at all-time highs.

They look at economic fundamentals, market pessimism, consumer confidence, fear, advancing stocks versus declining stocks.

In short, most are looking for capitulation – the final violent purge in which all rational actions get trampled under a thousand bulls running over that cliff to get out of the markets.

“We are looking at something that I think is pretty severe,” said Hersh Shefrin, a finance professor at Santa Clara University and author of “Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing.”

“Somehow, my gut feeling is we are nowhere close to bottom, if history is any precedent of how these things turn out.”

It all looked much different a year ago. That’s when the Dow Jones industrial average and Standard & Poor’s 500 index hit all-time highs. Today the Dow is more than 30 percent off its year-ago high.

The Federal Reserve and central banks around the world cut a key interest rate Wednesday – presumably good news and something many investors had been demanding. But the Dow that day dropped another 189 points, and that can be another sign the markets aren’t ready to end their slump, said Scott Rothbort, a finance professor at Seton Hall University and president of investment adviser Lake View Asset Management.

There might be a bottom “when we stop going down on bad news or we finally get good news and go up on good news,” he said. “You don’t know it until about 60 days after it happens.”

Hirsch, from the Trader’s Almanac, said he’s been watching the ratio of puts and calls. The options trading tools allow investors to buy or sell stocks in the future.

When the volume of puts (the option to sell) exceed calls (the option to buy), that shows traders are really afraid the market will go down. It corresponds, Hirsch said, with major market bottoms.

The threshold ratio hasn’t been met yet and he, too, isn’t ready to call a floor.

“We’ve got a lot of fear … but I think people are just starting to get frightened,” he said. “In the nastier bear markets, you get 40 percent to 50 percent of the market taken out of you.”

For James Paulsen, one likely indicator of an approaching nadir is when fundamentals, which in normal times act as a sign for investors, no longer factor into the equation. The chief investment strategist at Wells Capital Management in San Francisco said he sees signs of that already happening.

“If there’s no fundamentals, there’s no guide and that’s what leaves people feeling out of control,” Paulsen said. “There’s a lot of evidence we’re close to an interim bottom at least. But is it the bottom, who knows?”

The problem in predicting when the stock slide will end is that there are no typical patterns in markets, said Brad Barber, a finance professor at University of California-Davis Graduate School of Management who focuses on investor psychology. Markets bounced back from the crash of 1987 in a matter of months, but it took years for them to recover from the crash of 1929.

“Whether it’ll come back in a month or 20 years is something we won’t know until it happens,” Barber said. “The right question is, what level of stocks and bonds are you comfortable with?”

Comfort and confidence are critical to investor psychology, said Werner De Bondt, a behavioral finance professor at DePaul University in Chicago. The government has been trying, most notably with a $700 billion bailout package designed to take crippling debt off banks’ balance sheets.

“The only way trust can come back in this situation is we create a floor,” he said. “The (Treasury Secretary Henry) Paulson plan in a way was intended to do that.

“But right now, I’m not sure investors see that.”


(Greg Saitz is a staff writer for The Star-Ledger of Newark, N.J. He can be contacted at gsaitz(at)


AP-NY-10-09-08 1148EDT

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