If you watch any of the popular business networks on cable you will hear one word more than most, “bottom”. The term is used so frequently you could play a drinking game where every time says “bottom” you drink, I would imagine you would collapse after about an hour of playing the game.
So what does a bottom look like and why is everyone so anxious to make the call. Here are a couple of bubble market bottoms. One major distinction with these bottoms is that they encompass a full index.
The above is the NASDAQ from the late 1990’s to the early 2000’s. We all remember (well most of us) the hype that engulfed the technology sector that launched the NASDAQ to nearly 5000. The reason the NASDAQ reflects the bubble so well is because most technology stocks that were pumped up to extraordinary heights reside on the NASDAQ exchange. Notice that after the bottom was attained that the index did not rebound in weeks, it was slow and steady. If you had tried to buy as the knife was falling you may still be underwater today. Remember the NASDAQ only recovered to about half of its glory before the latest debacle.
The above is a chart of the Dow Industrial Average from the late 1920’s to early 1930’s. The bubble that burst in the late 1920’s is commonly agreed to be caused by a credit collapse (the world’s economies where in a similar dire straits as the US at that time, sound familiar). Since the US economy is based on expansion and contraction of credit, the Dow Industrial average is a good reflection of the pain felt by the US Industries. Again after the bottom is attained the rebound is slow and steady. Also if you attempted to catch this falling knife it could have been costly. Remember the Dow Industrial average did not return to its lofty heights of 1929 till the mid 1950’s.
My opinion is that the bottom will not feel like an opportunity, it will be a hard decision. You will be a minority among your peers and family when buying in.
