Is the stock market crash over?

Is the stock market crash over, Has the market rebounded, are we safe to jump back in?

Well lets look at the current state of affairs.  Unemployment rates are mounting all around the world and show no signs of rebounding. Companies both big and small are laying staff off and are revising financial estimates down for the coming year. Banks are still on life support. I just don’t see the good news.

But wait, say the professional investors, we don’t look at the market today, we look at the estimates for the market 6 months out and that is what we are buying on.  So, is the economy 6 months from now going to be better than what we have today? To argue this point we could take the usual route and drag out charts, economic theories, trend reports, and even a magic 8 ball and see if we could predict the future, but let me get off that track and look at some alternative, but equally important questions.

Looking at the graph to the left I have displayed the rate of change in the DOW month over month since October of last year. We can see then that the initial slide started off slowly with the DOW winding down less than 5% per month. Then it slowly starts to crawl out of the depths but does not have a positive month over month. And then we reach April; nearly a 15% positive increase from March. Obviously there is some strong sense by professional investors that the economic condition will improve substantially in the next 6 months. There are questions that need to be answered before blindly following the professional investor:

1. Have professional investors been very successful in previous downturns in calling market bottoms?
2. If point one proves out then we should expect some positive returns, the question I would ask then is 15%  an appropriate and sustainable number for a first leg in a rebound?

Or alternatively:

1. Do professional investors have a proven track record and are worth following?
2. If they are worth following is a 15% upswing normal to see after the bottom?

Track Record of Calling Market Bottoms

As this is a blog and not a thesis I can answer the first question quite quickly, No.  Looking at all of the substantial market downturns in the DOW since the 1930’s the same pattern is repeated: market pessimism followed by optimism and then unfortunately followed almost immediately by pessimism.  Professional investors have almost perfectly failed to call a market bottom in every major downturn, they almost always get in too early, crank up the market, and then see the market crash out again. The way markets recover from downturns is slow, month by month, and is made up of minor fluctuations that increase gradually.

Was the Rebound too much?

This leads naturally into our second question is the 15% increase this month appropriate and sustainable.  No, if the past is any indication we will see some or all of it returned. A 15% bounce up is just too much.  If a bottom was hit last month and things are turning around we should see small gradual returns, somewhere in the neighborhood of 1%, not 15%.

Final Thoughts on March’s Market Rebound

So is this the bottom? Impossible to answer but the odds have it that the professionals were wrong. Was the 15% uptick merited and likely to continue? I’d love to answer that question with yes but 15% is just too much of an uptick to see in one month- this looks very much like a purely temporary condition. We are going to give back at least some of this 15% gain over the next two months before we are ready to move forward again.