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Where is the Market Bottom?

By: Steve Johnson

7/15/2008 - 18 Comments

Now that Bernanke has admitted the financial markets are under heavy stress and we are officially in a bear market, where is the market bottom?

As an investor, spotting the bottom is very important. You don’t want to buy when the market is still falling, just like you don’t want to catch a falling knife. The best time to buy is after the bottom, but who knows where that is.

Dow 11,000-10,000

As of today, the market is now under 11,000, so we have already reached this range. At this point the financial markets are still under a lot of stress and yet to report billions of loses for Q2. If the federal reserve does not drastically increase the interest rates, then inflation will further reduce the value of the dollar, which could cause the stock market to increase even though it will be decreasing in value relative to the value of the dollar.

Dow 10,000-9,000

The consumer price index is at a 16-year low, which is eventually going to reduce the profits of the retail industry.  The auto-industry is in crisis, pulled down by the housing market collapse, as people can no longer get home equity loans to purchase automobiles.

Dow 9,000-8,000

I wouldn’t expect to see this range unless the unemployment rate rises above 7 percent.  Even thought wages are not increasing and inflation is further reducing purchasing power, many people still have money (or credit) to spend, which will result in profitable businesses.

Dow 8,000-7,000

I don’t expect to see this range unless the dollar collapses, which is becoming more and more possible as the OPEC nations are talking about moving to a different currency to use for oil transactions.  The speed at which the market could drop is also a consideration. If the market suddenly drops, it could trigger panic selling – which could devastate the global markets as stocks are oversold.

The future is uncertain as every major market in the world is now in Bear territory (down more than 20%).  Where do you think the bottom is?

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