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Friday, June 26, 2009

How to spot a real bottom

Many people still look for the bottom of the property bear market. They think the bottom will come soon…and that they will be able to profit from another big move up. This is not the sort of thinking you get at the real bottom. It’s the sort of thinking you get at false bottoms on the way down. It’s the sort of illusion that needs to beaten out of people by successive waves of disappointment.

Here’s what will happen. Prices will seem to stabilize. Hopeful speculators will begin to buy property again, counting on capital gains. Then, either property prices will fall again…or go nowhere. Eventually, the illusion will disappear. People will cease looking at houses as anything more than very durable consumer items, which cost money to maintain and never reward their owners with anything more than a roof over their heads . . . .

[S]tock market investors know there is some risk. But they still believe that you can make money by buying the dips…even the big dips. This strategy works in a bull market. It is murder in a bear market. In a major bear market, the investor comes back into the market after a dip…only to find himself in a bigger dip later on. He does this a few times and finally realizes that he is the biggest dip of all. Then, when stocks have gotten down to their major lows – at price to earnings ratios of about 5 or 8 – he is fed up. His illusions have all died in the bear traps. He’s ready to give up on stocks altogether.

Of course, that was the infamous message of the BusinessWeek cover of August 1982, which proclaimed “The Death of Equities.” BW, speaking for the great mass of disillusioned investors, had thrown in the towel.

We are far from there now. No major journal has run an obituary of the stock market. Instead, the question is ‘how much further will this rally last?’ Some think it is already exhausted. Others think it will last forever. But everyone’s thinking about it – and it’s not the sort of thinking that happens at a real bottom. At a real bottom, people have given up thinking about stocks. The illusion that stocks always go up over the long term is replaced by a new illusion – that they never go up at all!
-- from "What’s the Purpose of a Correction?" by Bill Bonner (6/25/2009)

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