Technical indicators for bottom-picking the current market are nearly nonexistent. Take a look at any chart of US indices, and you'll find a constant ascent with very little backtracking. The lack of testing important technical levels during the 1990s will shed negligent light on traders attempting to pick this market's bottom.
Minor Pullbacks Lend Little Help
Looking at a 20 year chart of the S&P 500 there are only a few levels of “support,” if they could even be labeled as such. The market moved up too quickly without any resistance or indication where the capital flow might be entering or exiting. 688 appears to be a relatively strong line, as does 600 and 488. The problem is that all of those lines are many percentage points away from each other, and each fall in between would be around 10-20%. This is far too big of a drop between support lines to give investors any comfort.
Where to Go from Here
Luckily, there are a few routes that investors have to find the bottom. The oscillating technical indicators are holding up well in the short term, with the RSI proving to be an excellent indicator on the short term. However, for the long term, it has not a leg on which to stand. The RSI (14) applied to the S&P500 shows the market to be extremely oversold for more than six months; even when it returns to levels above 30, the market could remain sideways for a matter of months.
Neither Trendlines nor Indicators are Helping this Time Around
Every trendline that was supposed to hold through the downfall has systematically been broken, one after another throughout the credit crisis. One cannot put much emphasis on trendlines for this fall, especially as the market reverses the huge explosion during the 1990s. When the credit crunch began, it seemed as though the sideways trading of the years 2000 to 2007 would have produced solid enough levels to hold up through the downturn. Unfortunately, none were able to hold through the selling pressure.
How to Pick the Bottom
Any bottom in this market is sure to be long and drawn out over a period of time. Throughout history, bottoming formations have been longer than the sell-off; it takes time for the market to price in every variable and find a level at which investors are willing to buy. Though there may be short term highs and lows in the markets, they will likely be the result of fiscal stimulus of the economy. The long term solution is ultimately in a timely bottom, one that will last for months if not years. Investors still do not know the outcome for the economy; it’s never been stress-tested to this degree nor as a result of a failed banking institution.
Buy Businesses, Not the Market
As with every crash, there are two investors who perform best: those who can avoid it, and those who can profit on the rebound. Warren Buffett is notorious for building huge amounts of wealth on the rebound, and he does so well because of his investment strategy. Warren Buffett does not buy the market; instead, he shops the market, buying only the best names and investments for his portfolio. When the market rebounds, it may all rebound together; however, the most financially sound businesses will be those that lead the market.
Leading the Market is the Important Factor
If you make 50% in one year and so does the rest of the market, you might as well have just earned 0%. Why? Investing is relative, just as gains are to inflation. If you're returning 2% per year but inflation is 3%, you have not advanced, but instead, have lost purchasing power. The same works with investing; the goal is to grow your money faster than others to beat the system and increase your net worth and purchasing power during retirement. Picking the best businesses will always generate the best returns on the rebound and prove to be a solid portfolio, even in a slowdown. Stocks with lots of cash, little debt, and a nice dividend to boot are at the top of the radar. Otherwise, 95% of stocks simply aren't worth buying.