Another Bear Market Rally or Have We Hit Bottom?

The S&P 500 is up around 10% since its low of 666.79 on Monday. (Investor's sentiment, including my own was so negative, that I decided to sell my puts and buy calls. It turned out to be a week too early, oh well (my calls are now about even).

It's remarkable how when the majority of investors are of a particular view the opposite of that view turns out to be correct. Remember, for example, the notions Nasdaq 6,000, Dow 16,000 (I'm thinking of Morningstar's call a year ago) 36,000, etc, China is safe until the Olympics, we'll have a stock rally until March? These, and many other consensus views have been proven wrong.

In early March, the consensus turned very bearish. The mood was captured in the Motley Fool article "What's Next? Dow 5,000?" and the Wall Street Journal's "Dow 5000? There's a Case for It." The WSJ piece came out on March 9--the day before the current rally started. I hope the WSJ article has the same place in history as Business Week's 1979 "The Death of Equities" cover.

There are still plenty reasons to think the market has far lower to go. We've been hearing the doom and gloom for weeks and know the story: the economy is in shambles, the previous decades' growth was based on spending borrowed money, Eastern Europe is collapsing and might take Western Europe with it, there are looming credit card and commercial loan defaults, hundreds of thousands of people continue to lose their jobs every month, housing prices are still plunging, etc.

But there are also reasons to think that the bottom in stocks was March 8th. Some consumer numbers are improving. The worst banks, if they are to be believed, are making money (but will write downs make them report losses?). The government is, at its customary slow pace, getting ready to reinstate the uptick rule and to modify the mark to market accounting rules. Whether these are good ideas or not, the market may respond positively.

The WSJ piece is another indicator. Further, the sentiment at the moment seems mixed. During all the past rallies many commentators were quick to call the bottom. There are many doing this now too. But what seems different is the growing chorus dismissing this week's market rise as just another bear market rally. The bottom callers and bear market rally callers seem about evenly mixed to me. I'd say this is a substantial improvement from the previous rallies.

Let's hope we did hit bottom. But don't be surprised if we go down another leg. I'll be looking to buy puts if we go up another 10% and I feel euphoric, or it seems to me that most investors are optimistic. An article from a major publication with a headline like "It's Safe to Invest Again" would be most helpful in making bearish bets.

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