So the question for many folks has become:

Are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

“In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer. In other words, think about yourself and the millions of other Americans out there who are:

1. Watching the values of their homes drop
2. Spending twice as much at the pump than they did a year ago
3. Watching their net worth shrink by the day

“And then ask yourself, has anything changed over the last couple of months? Have things gotten any better or have they gotten worse?”

Unless you don’t own a home, drive a car or do your own grocery shopping, then you might be tempted to say, “Things ain’t so bad.” But if you can relate to what I’m talking about, then you already know the answer this question.

Calling a bottom right now would definitely be premature. Consumer spending drives 70% of our GDP. You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

And just to show you where we are based on cold hard facts, here are three reasons why I know we’re not out of the woods just yet…

Housing and Real Estate

Nobody thinks this story has completely played itself out yet. Even the analysts that are on the more “positive” side of this debate still agree that we won’t see a bottom in the real estate markets until the end of the year.

And that’s being optimistic!

According to the National Association of Realtors, pending home sales dropped by 4.7 percent in May…that is its third lowest month on record. So things sure aren’t slowing down yet.

And even when the recovery does come along, many economists are predicting a protracted recovery period that could stretch to 2010.

The bottom line is, the less wealth and free cash to spur consumer spending, the less relief we’ll see for the overall economy in the short run.

Energy Prices

Like I said before, unless you don’t drive, then there’s a good chance the increases we’ve seen at the pumps have made a serious dent in your wallet.

Just last week the price of oil broke a new record, hitting $147 per barrel and $200 oil by the end of the summer isn’t out of the question.

Here’s why this situation won’t get better anytime soon…

If you were an oil and gas company, would you feel the need to go scouring the globe for fresh supplies right now? I mean, you’re sitting back, pumping out enough barrels to meet demand and you’re watching the price rise along with your profits on an almost daily basis.

In other words, there’s no economic incentive (just yet) to dramatically increase the amount of oil these companies produce. They’ll do so when our consumption of that oil drops below a certain amount.

But with all the pent up demand in countries like the U.S., China, India, etc., I don’t foresee that happening anytime soon.

We’ve all heard the argument that oil’s cheaper than it was in the 1980s, relative to current income levels. But at the end of the day, what really matters here isn’t the relative price of gas; it’s the perception of the consumer.

If they’re paying twice as much for oil today than they did last year, they have far less disposable income to spend on other things — which once again, can’t be good for the overall economy.

Relative Market Conditions

So the dictionary definition of a “bear market” is when the Dow falls by 20% or more.

We crossed the 20% mark last week. The same goes for the broader S&P 500 Index. Therefore, by any yardstick you want to use, we’re in a bear market.

Now, let’s take a look at some of the previous bear markets we’ve weathered and see how far the S&P had to fall before it began to recover:

• From 1969–1971: 33% drop
• From 1973–1975: 48% drop
• From 1980–1982: 26% drop
• From 2000–2003: 48% drop

From this data you can see that from peak to trough, the average bear market will show a 38.75% decline each time.

Considering we just crossed the 20% mark, it’s fair to say we’ve got a ways to go before we approach the average.

Remember, These Are Just Indicators!

The thing you really need to keep in mind is that all of this data:

• Home sales
• Energy prices
• Market index levels

They’re all simply indicators of where we are. The meaning you derive from them will depend on how well you know the markets.

For example, a seasoned value investor will look at falling stock prices like gold nuggets falling from the sky. That’s because an experienced value investor knows that there’s TONS of money to be made when they can buy stocks on the cheap.

It’s like walking into your local super market and finding all of your groceries on sale for 50% off.

And a seasoned trader loves a market with direction (no matter if the direction is up or down) because the trader knows they can short that market all day long.

That’s why it isn’t a bad thing that this market hasn’t bottomed yet. In fact, if you’re an intelligent person who’s interested in making money, then this could be the best opportunity you’ll have for a long time!

So equip yourself with the right tools, information and then go make the most of this market!

For more on this TickerHound question, click here…

Regards,

Wayne Mulligan
July 17, 2008

Indicators of a Falling Market was originally featured in the Penny Sleuth.