Thursday's Rout Doesn't Look Like a Bottom

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Aug. 5, 2011, 12:01 a.m. EDT

By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” 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.

/quotes/zigman/627449/delayed DJIA 11,383.68, -512.76, -4.31%

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 /quotes/zigman/627449/delayed DJIA -4.31%   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 /quotes/zigman/2766221 VIX +35.41%   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.

/quotes/zigman/627449/delayed Add DJIA to portfolio DJIA Dow Jones Industrial Average 11,383.68 -512.76 -4.31% Volume: 300.76M Aug. 4, 2011 4:30p var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); /quotes/zigman/2766221 Add VIX to portfolio VIX CBOE Volatility Index 31.66 +8.28 +35.41% Volume: 0.00 Aug. 4, 2011 3:14p var embeddedchart1085120985Chart = new EmbeddedChart('#embeddedchart1085120985', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:VIX'); jQuery.data($('#embeddedchart1085120985').get(0), 'embeddedchart', embeddedchart1085120985Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});

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.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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Loading more headlines... dow /quotes/zigman/627449/delayed 11,383.68 -512.76 -4.31% nasdaq /quotes/zigman/123127 2,556.39 -136.68 -5.08% s&p 500 /quotes/zigman/3870025 1,200.07 -60.27 -4.78% Kiosk 1238817600000 1270353600000

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MYRA P. SAEFONG Not too late for gold? Central banks in emerging markets have decided that it's still a good time go join in the precious metals party. 160789 1309982400000 1310072100000

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