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When the market has been hit with huge declines and the economy is in the dumps… there is always a temptation to call, yes a bottom… you do not want to give into that temptation unless you are absolutely sure that a bottom is at hand or else you will get burned… this is difficult… because when the market really stinks… there will be people coming on TV and telling you that we bottomed…. that stocks are cheap… that it is time to buy… let me tell you one thing for sure… as long as there are buyers, as long as every one is saying that we have bottomed… well, that is a sure sign that we have not… keep in mind too that most of the people who come and say we have bottomed are mutual fund managers who get paid, not for performance, but how much money they bring in… the size of the assets they manage… to put it simply, a lot of guys tell you we have bottomed need you to invest in order to make money… I can’t trust them because of that...

And don’t be confused by trading bottoms either… a trading bottom happens when the market holds at a certain level… when the Dow, and the Nasdaq, and the S&P 500 bounce wherever they fall to on a particular level… that does not mean that we have a real investment bottom… it means that we have a temporary trading bottom… that might make you some money short term, might not… but not that we have hit a long term bottom where you should feel very confident… trading bottoms have nothing to do with the fundamentals.

As long as analysts are upgrading stocks you are not going to get a real investment bottom… in fact, analysts down grades, signs of capitulation, are far more predictive of bottoms than upgrades… so what do you need to see when you can have a true bottom when the economy is in a nasty recession… first and foremost, things need to stop getting worse… they don’t need to get better… they need to stop getting worse… if the market has already taken a beating, scores of people will tell you that the bad news is already priced in the stocks… but that cannot be true if the news keeps getting worse… we don’t necessarily need to see signs that things might be getting better in 6 to 18 months… but once you get those you can bet that you are closer to a bottom if not there already… we cannot have a bottom while the wheels are still falling off the economy.

To get a real market wide bottom… you need to see wholesale capitulation… you need to see this kind of give up… sentiment needs to be incredibly negative… you don’t bottom when there are a lot of bulls out there… you bottom when most of the bulls have been converted to bears… the animal spirits of the people saying buy, buy, buy… need to be broken… and they switch to here, sell, sell, sell… before a true bottom… is at hand… how do we judge this king of sentiment… well, I have got some metrics, some barometers… I like to look the Investors Intelligence Survey, it comes out every Wednesday… it tells you what percentage of money managers are bullish or bearish… if less than 40% are bulls, then you have got one of the necessary preconditions for a bottom… 30% and you really should be close.

But it is only one piece… it is only piece of the puzzle, you get a real bottom what I call a crescendo sell off… when there is really no one left to sell… that is what I always look for… that is why you have to wait for all of the bulls to become bears, for people not to want to come on TV and recommend a stock, and for people to say sell no matter what… in a crescendo sell off you will see a dramatic disparity between stocks that are hitting new lows, usually 400 to 700... and stocks that are hitting their new highs… only a handful…again, only in pieces, we have seen this from time to time and it has not been a bottom… in a crescendo sell off everyone is panicking… and all of those people who have been claiming a bottom at hand, well they sell… that is when you get an actual bottom… when all of the selling is actually finished.

Now, when it comes to individual stocks one of the great tell of a bottom is when they are hit with bad news and the stock does not go down… that is how you know that the negativity truly is priced into the stock… that is a bottom… bad news, no reaction… no one left to sell.

Here is the bottom line...