Why We May Not Be at the Bottom

Aug 22, 2011 | 11:44 AM EDT  | Comments
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(In response to Ken Shreve in Columnist Conversation at 10:55 a.m.)

Ken, I believe you are correct that investors are chomping at the bit to trade a rally. I have maintained that for a few weeks. And it's why stocks might not be at the bottom.

At the bottom, the only bit chomping is to sell stock and avoid more pain. At the bottom, selling is forced from redemptions/margin calls. At the bottom, the talking heads on Bubblevision proclaim, "It's not too late to sell." At the bottom, bears outnumber bulls in the Institutional Investor survey. At the bottom, CEOs buy stocks in hundred-thousand-share blocks. At the bottom, stocks get cheap on normalized valuations. At the bottom, no one wants to risk capital to trade a bounce.

I don't see much of these conditions yet.

Although dead-cat bounces can occur anytime, they will be sold into, even if fund managers would prefer not to. Mutual fund cash levels are at record lows and redemptions at record high levels. Stupid high volatility and fresh memories from 2008-09 will motivate redemptions. Cramer and Kass are totally correct: We need to restrict the machines.

Remember, they sell what they want first, until those bust. Then they sell what they can, what's left holding up. Even high-quality defensive names have some risk in a cyclical bear market, before it's over. If we are entering a new cyclical bear market, even playing defensive sectors can sting.

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