Signs Grow that Stock Market May Have Bottomed Out

October 17, 2008 at 2:50 am Leave a comment

The stock market’s bottom faced, and passed, its first major test Thursday, giving investors hope that the recent weeks’ sickening price drops are over.

Three days after the biggest one-day jump in history, the Dow Jones industrial average rose 401 points, or 4.7%, to 8979. The rally came late in the day after the Dow had fallen as much as 380 points and had threatened setting a new bear market low.

Given the uncertainty facing the economy and credit markets, investors are braced for additional tests of the bear’s low of 8451.19 on Oct. 10. But the market’s ability to close above last Friday’s panic lows is a good sign, says Todd Clark, a trader at Nollenberger Capital Partners. “It was a successful retest,” he says.

It is normal for investors to go back and probe prior lows after a rout. On Wednesday, the Dow plunged 733 points. The ability of stocks to bounce off lows often indicates that stocks are at or near a trough. The market bounced despite a barrage of bad news, including weak factory activity in the Mid-Atlantic region.

Signs that stocks may be approaching a bottom include:

Rising fear. A closely watched “fear gauge” hit a record high on Wednesday and is now 400% higher than it was at its lowest point within the past year. When fear is high, it suggests that people who want to sell have gotten out. Investors then feel confident about buying and driving prices up.

Big and small investors bail. Mutual fund investors have yanked $56.6 billion out of stock funds this month, eclipsing the record $53.2 billion in outflows in July 2002, according to TrimTabs. Hedge funds — private pools of money which have recently been hurt by poor returns, investor redemptions and margin calls — are also experiencing outflows, with $43 billion exiting last month, TrimTabs adds.

Large swings during the day. The Dow has swung a record 498 points on average over the past 30 days, says Scanshift.com. That’s more than double the 231 average intraday range last year.

Some investors who waited to jump in are taking the leap. “I bought into the market today for the first time in eons,” Gary Kaltbaum of Kaltbaum & Associates, who had been in all cash, wrote in a note to clients.

But while investors hope the market has hit bottom, it often takes time before it’s clear whether there’s been a recovery, says Bill Stone of PNC Wealth Management: “You get these rallies, and some (investors) sell … but eventually one of (the rallies) doesn’t stop, and you break through.”

Source: USA Today

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Entry filed under: Business, Finances. Tags: , , , , , , , , .

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