Do you think DOW has bottomed out?

A look at the Dow's worst drops since 1899

Bottoms Rarely Look Like Thursday's Rout

by Mark Hulbert

Friday, August 5, 2011

Market declines rarely end with days like Thursday's 513-point drop for the Dow.

So even if you think that we're just suffering a mere correction within an ongoing bull market, you still should be prepared for lower prices in coming sessions.

That at least is the conclusion that emerged from my analysis of past bear market bottoms. The days on which those bear markets actually registered their final lows typically were rather uneventful — nothing like what we saw on Thursday.

Consider March 9, 2009, the day of the closing low of the 2007-2009 bear market, arguably the worst one since the Great Depression. Even though there were many days during that bear market that witnessed panic selling, the day of the final low experienced a drop of just 79.89 points.

It was more than three months earlier than then that the Dow Jones Industrial Average DJIA (^DJI - News) experienced a panic-induced decline that was as bad as Thursday's. That day was Nov. 20, 2008, the day when — not coincidentally — the CBOE's Volatility Index (VIX - News) spiked to its all-time closing high near 81.

Many traders made the same mistake then that I fear that is being made today: Thinking that panic selling signals a low. They were three-and-a-half months early.

Or consider the Crash of 1987, which is the grandaddy of selling panics in U.S. stock market history. On that day, Oct. 19, the Dow dropped 22.6%. And even though the Dow bounced back impressively over the two trading sessions following that Crash — gaining 5.9% on Oct. 20 and another 10.1% on Oct. 21 — the stock market's post-Crash low wasn't registered until Dec. 4, more than six weeks later.

Chances are that the final low of the decline we're experiencing will not be recognized as such until well after the fact. It's most unlikely that, on that day itself, so many traders will be doing what they did on Thursday — falling over themselves announcing that the bottom has been seen.

An old Wall Street saying has it that they don't "ring a bell" at market bottoms. It would appear that this saying contains a lot of wisdom.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.