Easy vs. Hard Bottoms

Today the major market indices have been fluctuating on both sides of Friday’s close, occasionally flirting with a short-covering rally only to make a hasty retreat and begin what looks like the beginnings of another bull whipping.

Last Thursday I stuck my neck out and said, “with the SPX at 687 as I type this, we are very close to an intermediate-term bottom.” Frankly, I envisioned a more impressive bounce than the current situation, which still has the SPX treading water at 687. A question that is worth pondering, however, is what type of bottom is most likely to stick. Sure, a 300 point jump in the DJIA is likely to attract some additional money on the long side, but it is also likely to further embolden many of the shorts. In the current market environment, I would call that type of V-shaped bottom an “easy bottom” and suggest that the shorts are not likely to let the current bear buffet end with one sharp move. The easy bottom is more likely to be yet another bull trap.

Compare an easy bottom with a hard-fought one. Instead of the 300 point jump that brings the markets more than a white knuckle distance away from the edge of a cliff, imagine a market in which every point becomes a matter of trench warfare, with some territory changing hands dozens of times between bulls and bears before bulls can finally lay claim to infinitesimal victories. These will be largely moral victories at first, but over the course of time as a war of attrition develops, many small gains will eventually add up to momentum. Said another way, I do not believe the bears will throw in the towel all at once, but will slowly lose interest as the pickings become slimmer.

So…as much as an SPX back over 700 might seem to give that devilish 666 bottom the best chance of holding, I believe that the hard bottom is more likely to hold than the easy bottom.