Anatomy of a turnaround
It’s not hard to determine the sentiment of a market like the one emerging in October 2008: Fear. Fear grips everyone, and depending on the degree of the crisis, it can feel like the end of the world. In 2008, it felt like the financial system was going to fail. Not every bear market ends that badly; this was a generational event.
Fear runs rampant in bear markets, but the bull can’t return until the bearish sentiment extinguishes itself. This is why at the bottom the times seem darkest — the market often as though it’s going down forever, never to turn higher again. The bottom for us was when the late Mark Haines called the bottom on March 10, 2009. It is commonly referred to by fans as the Haines Bottom.
The aftermath of a bear market is met by fear and disbelief. The bear has done its job of driving participants out of the market. Market participants and followers alike are scarred by the experience, and it colors their perception of future moves as well as the fortunes of the economy. In late 2009 and 2010 when money managers, politicians and traders were interviewed on television, the question they were asked universally was, “Do you think there will be a double-dip recession?”
Compare and contrast this to the sentiment just after the top in 2007 when people were expecting a soft landing. As the market pushed higher off the bottom, the concern, even as prices climbed, was whether the economy would slip into recession again. This is how a market climbs a wall of worry and often, even on bad news, the market will climb.
Then, an interesting twist materialized. By February 2011, when the sociopolitical movement known as the Arab Spring developed, the markets started topping out. The economy slowed down, partially as a result of the Japanese earthquake, tsunami and nuclear meltdown. The media once again started talking about a slowing economy but stepped away from double-dip recession references.
Echoing sentiment eerily similar to late 2007, the “soft landing” became a “soft patch.” It went so far that Bob Pisani of CNBC attended a charity event of hedge fund leaders on May 27, 2011, where the prevailing opinion of the traders in the room was a “see-over trade.”
In his “Trader Talk” blog the next day, Pisani reported traders acknowledged the economy had slowed down but anticipated growth again in the second half of the year that allowed market participants to “see over” or beyond the bad numbers that were materializing at the time. They also believed the Fed would keep the dollar weak. In fact, the dollar had bottomed the first week of that May, starting a long-term uptrend. Pisani’s sources also believed the politicians in Washington would not allow the economy to falter heading into an election year. This is the kind of complacency headline near a market top that sentiment traders seek.