How do we see a bottom coming? If there is one thing I’ve done best in my career on Wall Street, it is spotting bottoms in the market. No techniques, no formulas, no real hard and fast rules. Understand real bottoms don’t happen all that often. But when they do, if you call them correctly, you can stand to make a small fortune. Bottoms are great because they represent fantastic buying opportunities with not very much risk, as long as your bottom call is right. So how do you call a bottom?
First let me tell you the wrong way to do it, and then I’ll help you get it right. A lot of people want to rely on pure technical analysis. They look at a chart, see that a stock has been knocked down far and then stop moving. These chartists, even the best ones, are wrong – they’re wrong often. Sometimes a stock that goes into free fall is only taking a breather before sprinting towards zero. The chart is not enough. You need to look at the [fundamentals] too. Technical analysis, as they say, is always right until it’s wrong. I have never ever seen any software package work for this despite what the brokers tell you and a lot of the analysts at major firms get pressured into calling bottoms by their major customers. I’ve never seen a stock bottom out based on earnings reports either. The thing about a bottom is that too many people see it coming, and then it won’t happen.
The other crucial fact about bottoms is that they rarely happen all at once. I have found over and over again that markets bottom in thirds, sector by sector, over a period of days if not weeks; bottoms occur in stages. Now, here’s how I work. I just want to talk to you about investment bottoms. You want to see three things when looking for a bottom. Market sentiment must be bad, and I mean front page of the New York Times bad, not the business section – the front page, preferably the right hand column. When the malaise reaches all the way up there, that’s a terrific indicator that you’re in a bottom. You could also look at the Investor’s Intelligence Survey of money managers – it comes out Wednesdays. When you have a majority of bears, when there are so many bears that the exceed the number of bulls, good sign you’re close to a bottom.
When you see mutual funds pulling out of the market in a nifty way, that’s another signal that the bottom might be nigh. You need to be right when almost everybody else in the market is wrong. You also need to be looking for capitulation from the bulls who are holding out on the hope. When they give up, when they jump, you get a massive crescendo of sell-off. You’ll see lots of volume and sinking prices as the last hold outs give up and recognize where they really live and they sell. That’s our chance. You will not have a bottom until these investors have thrown in the towel. A crescendo bottom is one of those rare times when the market bottoms all at once, not in thirds. This happens very rarely, and then you back up the truck and you start buying.
Finally, big bottoms usually have a catalyst when market sentiment is in the gutter. When even the most bullish of the bulls are like Achilles, off sulking in his tent. And then you get some bad news for the market – sub-prime lending crisis, Asian contagion, Yen and dollar something, it’s not a catastrophe, but has a wide spread effect on the market. The last couple of times we went to war with Iraq – exquisite bottoms. Understand, the market hates nothing more than uncertainty. In the 24 hours leading up to both wars I managed to catch great bottoms because investors couldn’t handle the total lack of certainty so I got to buy a lot of stocks on the cheap. The bottom line, how do you spot a bottom? Don’t be discouraged when you see these three things, don’t give up when everyone else is giving up. It’s a bottom, and you want to be the only guy that knows it so you can buy up stocks for next to nothing. And then relax, as they start to rise afterwards.
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How to Spot Market Bottoms
By Jim Cramer
How do we see a bottom coming? If there is one thing I’ve done best in my career on Wall Street, it is spotting bottoms in the market. No techniques, no formulas, no real hard and fast rules. Understand real bottoms don’t happen all that often. But when they do, if you call them correctly, you can stand to make a small fortune. Bottoms are great because they represent fantastic buying opportunities with not very much risk, as long as your bottom call is right. So how do you call a bottom?
First let me tell you the wrong way to do it, and then I’ll help you get it right. A lot of people want to rely on pure technical analysis. They look at a chart, see that a stock has been knocked down far and then stop moving. These chartists, even the best ones, are wrong – they’re wrong often. Sometimes a stock that goes into free fall is only taking a breather before sprinting towards zero. The chart is not enough. You need to look at the [fundamentals] too. Technical analysis, as they say, is always right until it’s wrong. I have never ever seen any software package work for this despite what the brokers tell you and a lot of the analysts at major firms get pressured into calling bottoms by their major customers. I’ve never seen a stock bottom out based on earnings reports either. The thing about a bottom is that too many people see it coming, and then it won’t happen.
The other crucial fact about bottoms is that they rarely happen all at once. I have found over and over again that markets bottom in thirds, sector by sector, over a period of days if not weeks; bottoms occur in stages. Now, here’s how I work. I just want to talk to you about investment bottoms. You want to see three things when looking for a bottom. Market sentiment must be bad, and I mean front page of the New York Times bad, not the business section – the front page, preferably the right hand column. When the malaise reaches all the way up there, that’s a terrific indicator that you’re in a bottom. You could also look at the Investor’s Intelligence Survey of money managers – it comes out Wednesdays. When you have a majority of bears, when there are so many bears that the exceed the number of bulls, good sign you’re close to a bottom.
When you see mutual funds pulling out of the market in a nifty way, that’s another signal that the bottom might be nigh. You need to be right when almost everybody else in the market is wrong. You also need to be looking for capitulation from the bulls who are holding out on the hope. When they give up, when they jump, you get a massive crescendo of sell-off. You’ll see lots of volume and sinking prices as the last hold outs give up and recognize where they really live and they sell. That’s our chance. You will not have a bottom until these investors have thrown in the towel. A crescendo bottom is one of those rare times when the market bottoms all at once, not in thirds. This happens very rarely, and then you back up the truck and you start buying.
Finally, big bottoms usually have a catalyst when market sentiment is in the gutter. When even the most bullish of the bulls are like Achilles, off sulking in his tent. And then you get some bad news for the market – sub-prime lending crisis, Asian contagion, Yen and dollar something, it’s not a catastrophe, but has a wide spread effect on the market. The last couple of times we went to war with Iraq – exquisite bottoms. Understand, the market hates nothing more than uncertainty. In the 24 hours leading up to both wars I managed to catch great bottoms because investors couldn’t handle the total lack of certainty so I got to buy a lot of stocks on the cheap. The bottom line, how do you spot a bottom? Don’t be discouraged when you see these three things, don’t give up when everyone else is giving up. It’s a bottom, and you want to be the only guy that knows it so you can buy up stocks for next to nothing. And then relax, as they start to rise afterwards.
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