DOW Breaks 7000 – Where’s the Bottom?

The DOW broke through the psychological support at 7000 this morning. So where’s the bottom? 

Bottoms happen when there is a wash out. These are the conditions for a wash out – and we’re not there yet. 

Experts say many of the conditions associated with a true market bottom are missing: 

•Not enough fear. At market bottoms, people are scared, really scared, so scared that investors who want out of stocks, get out. As a result, a closely watched Wall Street "fear gauge," known as the VIX, normally shoots to the sky. On Friday, the VIX closed above 49. But that doesn't come close to the fear level on Nov. 20, when the S&P 500 hit its bear market low, and the VIX topped 80. 

"We haven't seen a true fear spike, and that usually means there is another shoe to drop," says Price Headley, chief analyst at BigTrends.com. 

•Not enough bears. Too few investors have given up hope and turned bearish, which normally occurs at troughs, says Todd Salamone, senior researcher at Schaeffer's Investment Research. 

The number of investment newsletter writers who said they were bearish last week, for example, was well below the number of bears in November when the lows were put in. Similarly, 56.7% of investors surveyed last week by the American Association of Individual Investors said they were bearish — nearly double the long-term average. However, that was still fewer than the bears present at the panic lows hit in October and November 2008, and in March 2008, when JPMorgan Chase bought Bear Stearns when the Wall Street bank was on the verge of failure. 

"The mentality is, we're down 50%, how much lower can we go?" Salamone says. "If the lows get taken out, those types of investors are potential sellers." 

•Not enough good economic news. Stocks historically turn up before the economy. But that hasn't occurred yet because the economic data, ranging from home sales and job losses to retail sales and factory orders, keep getting worse. That is forcing economists such as David Rosenberg of Merrill Lynch to continue to lower 2009 and 2010 profit projections for U.S. companies. Stocks are not going to shoot higher until there are signs that the economy is getting better. And that will depend on how successful Obama's stimulus plan is in jump-starting the economy. 

Another big wild card: how effective the bank rescue plan, details yet to come, will be in restoring confidence in banks and getting credit flowing. 

Watch these conditions for a bottom wash out.