As most of you know, my position has been that the lows for the year were registed on Friday October 10th. I still believe that that day marked capitulation – at least for the intermediate term. The Dow swung down more than 700 points and the S&P 70 intraday on enormous volume before a ferocious intraday reversal and rally. So far, though it’s been tested, the 840 low we registered that day on the S&P 500 has held.
But creating a bottom after this kind of panic and trauma is apparently a process. It was probably too much to expect a huge, sustainable, snapback rally.
Perhaps the best analogy is what happened in the wake of Black Monday October 19th, 1987. Those lows around 225 on the S&P essentially held too, but it took the market 7 weeks to feel comfortable that the bottom was in. The lows were tested a week later on Monday October 26, 1987 and a third time on Friday December 4, 1987 (S&P 1987 Chart).
This time around we tested the lows on Monday October 27th when the S&P closed at 849 (S&P 2008 Chart). If history is any guide, we might have to test them one more time in the next couple of weeks. The selloff over the last week could be that test.
This does have the feel of a bottoming process to me as the intensity of fear and selling pressure has clearly not reached the pitch it did the week of October 6-10. But the time table, as always, is unclear.
UPDATE (Thu 11/13, 12:45pm PST): Kirk linked to this post in today’s linkfest: “The analogy to 1987”.