ANATOMY OF A BOTTOM
by Puru Saxena
Editor, Money Matters
August 22, 2007

After going through all the technical and sentiment data available, I am more convinced than ever that a major bottom was formed in the markets last week. Below I present the reasons –

a. Volatility Index (VIX) which measures market fear surged to 37 intra-day on Thursday before reversing and settling at 30. On Tuesday, it fell further to 28 - we may have seen the top in the VIX.

b. On Thursday, over 1,000 US stocks recorded fresh 52-week lows and only 10 stocks hit new highs - this extreme reading is a symptom of a severely oversold market

c. The Put/Call ratio, which measures the number of put options (bets on the market declining) versus call options (bets on the market rising) reached 1.3 which is even higher than the level recorded at the bear-market double bottom in October 2002 and March 2003. The current reading indicates that the majority of market participants are positioned for a further fall and not many are betting on a rise. Such a high level of bearishness is a great "bullish" contrarian signal.

d. The latest survey done by Investors Intelligence shows that the level of bullish advisers has shrunk to 43% from close to 60% which is consistent with previous market bottoms

e. The Bank Index in the US (a leading indicator) also bottomed last Thursday and has been leading the advance off the lows

f. The Fed cut the "Discount Rate" by 50% and this is a sign that it will probably cut its Fed Funds Rate at its next meeting. Rate cuts are bullish for assets and negative for the US Dollar.

g. Finally, Thursday marked a "key" day reversal. In other words, after being down significantly during the day on massive volume, US stocks managed to close higher representing panic and capitulation.

So, you have to ask yourself the following question:

If the capitulation has already taken place as evidenced by Thursday's data and the majority of market participants/advisers are now stark bearish, who is left to sell???

Gold and silver shares were also whacked during the recent rout, which is inconsistent with the bullish monetary and economic backdrop for precious metals – rising monetary inflation worldwide, imminent interest-rate cuts in the US and expanding credit spreads.

In my view, the above data combined with the prevailing negative sentiment is screaming a "MAJOR BOTTOM". Investors are advised to accumulate major positions in resources (miners, energy stocks, uranium stocks, precious metals stocks) and the emerging markets during this widespread doom and gloom. After some additional consolidation and a re-test of last week's lows the advance should resume.

The above content is taken from the recent “Email Update” sent to subscribers of Money Matters.

© 2007 Puru Saxena
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