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Is It All Up From Here?

Conditions are ripe for a rally, according to one money manager. But…

Is the worst over? There might be some clues in the crash of 1987: Although the news events and economic conditions were different, the magnitude and speed of the market's demise was awfully similar to what happened this October and November. And, according to quantitative money manager ICON Advisers, there's a good chance a rally is in the offing. But there are a few caveats.

ICON President Craig Callahan thinks the choppy volatility, new highs and lows, and up and down volume that have followed the October through November drop are indicative of a bottom formation — much like the six weeks that led up to 1987's choppy recovery into 1988 and on into 1989, he says in his December market commentary. The steady growth in the money supply (M1) also portends better economic days, he says.

So exactly when will it go up? Well, first the panic sellers — scared investors who just want out, the margin call investors who borrowed to buy their shares, and the hedge funds that face redemption requests or needed to cover borrowed funds — need to be fully flushed out, he says. Only then will the market rise, he says.

Secondly, a corporate bond rally must happen first for stocks to follow suit. But the growing number of days on which more than 90 percent of the trading volume is in declining issues is a good indicator, he says. “At major market bottoms there are, on average, four of these within 30 to 60 days of a bottom. We have had 10 of those days in the last 45 trading days,” he writes.

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