20 Second Advisor: 14% in a month (or musings about market bottoms)

I’ve often written about the dangers of timing the market. See this article for how I liken it to catching a falling knife. In that post, I describe how investors who get out (often near the bottom) may miss out on the substantial returns that have historically occurred after a market bottom.

It’s worth asking: what causes a market bottom? Well, market low points are basically functions of supply and demand. Markets fall when there are more sellers than buyers. Conversely, when there are more buyers than sellers the market will increase in value. When enough people stop selling out of fear and/or when prices get substantially low enough that investors who have cash on the sidelines decide the risk is worth deploying their hard earned money into equities, we will see a market bottom.

Anecdotally, I feel that most market bottoms are not born out of some great news that brings all the investors back to the market. To me, it seems that most market bottoms occur on some random Tuesday when the last of the “market timing people” have capitulated to their anxiety and there are simply no more sellers left. The tide shifts and suddenly there are slightly more buyers than sellers. The market reverses course and marks its low point.

Now I’m not speculating that we’ve reached a market bottom. Maybe we have and maybe we haven’t. But, the Dow Jones Industrial Average just had its best month since 1976 – up 14% during the month of October. At some point, there will be no more sellers left and the tide of the next bull market will begin.