Sunday, August 31, 2008

The Alphabet Bottom

As mentioned in my book, MONEYWISE one recognizes an optimist by one who gets out of bed in the morning. As optimists, after any significant decline, we start looking for signs of a bottom and we use chart patterns as our models. We label bottoms as they appear to be described by letters. The most dramatic is the “V” shape where there is a sharp decline to a singular point price level and then a recovery without any meaningful interruptions. We see these types of bottoms in a single day chart. They signify that a large seller or sellers are accommodated by getting out at any price. Then the buyers come in to buy cheap stocks. Most of the time a single “V” bottom does not lead to a substantial recovery, but prices turn down again and form another “V” at similar prices. This formation is often labeled a “W” or, if separated by some time, as a double bottom. “V” and “W” bottoms appeal to short term traders who have taken advantage of exhausted former owners. The new owners or more correctly, renters, look to enjoy an immediate robust recovery. These people are not the readers who will get the most out of Money Wise.

The longer term investor who thinks in ten year and longer goals, and who will get the most out of reading Money Wise, will be looking at what can best be called a “U” shaped bottom. This bottom formation takes a while to develop, in some cases, years. Often this pattern is typified with low relative volume, a narrow trading range which can exhibit high daily volatility but not much forward movement. The result is that there are fewer market price headlines and commentators refer to dull or mixed markets. Few analysts focus on the fact that during this time of base building companies are catching up to their stock prices and are moving ahead of them. Often during these periods companies sort out their opportunities, they leave certain businesses, price points, and distribution channels. New, invigorated management come to the fore at the operational level and some changes are made at the executive level.

I believe that we are in a “U” shaped pattern which should allow long term investors to feel that in general they have seen the bottom and begin to look for the elements of better stock prices. These elements will not be in the headlines or sound bites, but can been seen in walks through shopping areas and malls. The numbers of cars on the road or searching for parking spaces are other clues. Lack of inventory in stores and plumbing supply locations can be viewed positively. I am starting to see some glimpses of these clues. Thus, I am cautiously betting on a “U” shaped bottom as in the United States.

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