Looking for a Bottom? Look to Wall Street

Wall Street created this mess and they continue to mislead everyone who bothers to listen. But it will be Wall Street that signals a bottom if you know what to look for. In short, watch for massive downgrades and/or extreme pessimism. This is how the game is played. Remember how the Internet bubble played out? Wall Street surely won’t tell you when to get out of the market. But they will tell you when to get back in if you know how to read their actions. The buying opportunity will be shortly after they’ve thrown in the towel. After bubbles burst, Wall Street creates so much pessimism that capitulation follows. The big problem is that they design these blowouts in a way such that most investors are stuck holding stocks all the way down so they don’t have any cash to buy when the bottom hits.

So when you start to see widespread sell signals or large downward earnings revisions across the board, you should have your hand near the trigger and wait for some signs of bottoming. Until you see this, it’s likely that the only bottoms made will be short-term. I cannot predict what the signs of a real bottom will be in advance, but you should be looking for fundamental changes in the economy. Although there are many things to track (inflation, interest rates, the financials, etc.) real estate will be a big indicator. You might look for a decline in median home prices to median wages back down to around 3.5. The problem is that it is very possible that this ratio won’t be reached for many years. And a stock market bottom could occur prior to a bottom in the real estate market.

A bottom might take quite a bit of time because Wall Street is only beginning to acknowledge the problems. Over the next few months, I would estimate we’ll begin to see numerous downgrades and earnings revisions. In the meantime, it is likely that we will see some sort of substantial rally prior to the next sell off down below the recent low of around 10,732. This could take months or a couple of years. The key thing to remember is this – wait for Wall Street to send out nothing but negativity. Then watch the market respond. A bottom is most likely not far from there.