We've touched on this topic before, but with calls of "the bottom is in!" reverberating across Wall Street, we thought it might be time to revisit it.
What are the markers of durable troughs, often referred to as "bottoms," in asset values?
There's no failsafe sign, of course, and there's no guarantee that this process will play out as its historical predecessors have. But if we could point to a single factor common to most long-term bottoms, it's a sequence in which traders and investors move from hope to revulsion to indifference.
First you'll hear expressions of hope that the bottom is in. We've certainly heard plenty of that over the last three weeks or so as stocks have lurched up from their March 9th lows.
Then you'll hear expressions of revulsion against stocks, including the idea that investors might be better off avoiding them altogether in favor of "safer" assets such as bonds. As it happens, we saw just such an argument a few days ago from a well-known, highly-regarded analyst. Far from discouraging for equity investors, this is a sign that the revulsion stage is underway.
Ultimately, however, what we need to see is a grinding sense of indifference toward stocks. Partly reflected and partly driven by the media, investors will develop a sense that stocks just aren't worth the effort. They'll neither love 'em nor hate 'em. They'll simply stop talking about them altogether. Under those circumstances, neither buyers nor sellers will have the itchy trigger fingers they've had over the last few months, and the buying and selling will happen quietly, off the front pages. Only then, we think, will the foundation be set for the next major bull run in equity values.