What is a Market Bottom and Why You Should Care


Some recent sizable gains by the Dow Jones Industrial Average left folks pondering: Has the market has finally reached what is referred to as "the bottom" and is it on an uptick?

But, like in recent weeks, mixed signals have been sent to consumers and investors as the bulls and bears battle over stock market supremacy. For those looking for tell-tale signs, like a parade of floating balloons to recognize the rallying of the Dow, expect a long wait.

On October 9, 2007, the Dow Jones Industrial Average peaked at 14164, and on Oct. 30, 2008 it closed at 9180. That’s a steep decline from a little over a year ago.  Failing banking institutions, record unemployment levels and underwater mortgages have weakened the stock market over the last few weeks. And, earning results have left investors tepid about market exposure and money loss.


Past Bottoms
In 2000, the technology industry saw its financial bubble burst and the resulting descent  picked up momentum as a result of September 11th and corporate scandals, like Enron (that led to Sarbanes Oxley Act of 2002) to protect consumers against fraud). In 2003, the Dow rose 25% and set a record three years later when it peaked at 11727, six years after peaking at 11722.

Despite the market's dizzying ride, in recent years, unlike the Great Depression, government safeguards, including the FDIC, have resulted in consumer protection.

However, like 1929, there are no sure signs of the bottom until after it has been hit, and the same can be said of the top. "It normally takes about 12 months to go from peak to trough,” says Dan Hassey, Senior Research Analyst at DiGeorgia and Associates. “Once the market hits that bottom, it tends to base, or goes sideways, and the basing period lasts on average about seven months.” This base generally gives investors the opportunity to invest before its peak, so focus on catching the bottom and riding the wave up is more about luck than logic.

Turmoil that stems from the current financial crisis continues to play a part in the markets, like 1987 and 1929, keeping investors clinging to their money. Other than that, times are different. The demise of Lehman Brothers and the near failure of AIG (Stock Quote: AIG) demonstrates that Wall Street is not what it was a year ago and the markets reflect the uncertainty that has taken place as a result, says Hassey. But one things for sure, "this market is cheap."

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