The Five Signposts for a Market Bottom

1. S&P 500 Index (SPX) holds above the 1000 level – The 1000
area on the S&P has double-barreled technical significance. First, it is
the site of the S&P’s 195-month moving average, a long-term
indicator that few investors follow. This moving average very often
represents the last “line of defense” from which a bottom can take
hold after a major decline. And second, 1000 is one of those “super
round numbers” that hold extra technical significance as potential
support and resistance levels.
2. The CBOE Volatility Index (VIX) closes below 40 and
preferably below 35 – The record closing levels of the VIX in recent
days are encouraging as a broad indication of the high levels of
investor fear that often accompany market bottoms. But this is a
difficult timing tool as no one knows just where the VIX will ultimately
peak, and higher VIX peaks are almost always accompanied by lower
stock prices. The 35-40 area marked the VIX peaks on three separate
occasions in 2007-2008. A decline by the VIX into this zone (or
preferably below) would likely represent a strong “all clear” signal for
the market, as it would indicate a break in the “fever” of the banking
and credit crises.
3. The Fed cuts the fed funds rate to 1.25% and preferably to
1.00% - While the Fed’s 50-basis point rate cut to 1.50% this week
was necessary (and long overdue), further Fed action is necessary to
help reliquify the banking system and lower mortgage reset rates.
4. December gold futures close below $800/ounce – The financial
crises and the plunge in share prices has spawned a bubble in gold
prices, and the bursting of this bubble – as evidenced by a close
below $800 – would have very positive implications for the stock
market.
5. Stocks begin to react positively in October to third quarter
earnings reports – Expectations for the earnings reporting season –
which began this week – are quite low. To the extent stocks react
positively after they report their earnings – especially in the crucial
days immediately following these reports – this could have extremely
bullish implications for the market. Such positive reactions would
indicate that current share prices have already discounted the current
weakness in the economy, and savvy investors are expecting these
results to stabilize or improve in the months ahead.