Spotting the bottom

Here’s how veterans recognize that a bear market is near its last phase:

• Downside breadth increases. That is, market declines become broader, including even stocks that had been strong before. More issues are making new lows.
• “Oversold” conditions (periods in which the market seems to decline precipitously) extend for longer periods of time. Technical recoveries are relatively minor.
• Pessimism spreads, but analysts and bullish advisories still discus “bargains” and “undervalued issues.”
• Stocks continue to be sensitive to bad news. The market becomes very unforgiving of poor earnings reports and monetary difficulties.
• Trading volume remains relatively dull. Prices seem to fall under their own weight, the result of a lack of birds rather than urgent selling.

Important: The bear market isn’t likely to end until pessimism broadens into outright panic, and until institutional selling becomes urgent.

Some of the most reliable nontechnical signals that the bear market is over:

• When the mass media begin to headline the fact that the stock market is hitting its bottom.

That’s when magazines and newspapers, and TV networks, warn of even lower market levels. When those reports appear regularly, wise investors know the bottom has already passed.