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“No bottom in sight” – Fortune 4/21/09

“Euro zone to tell G7 economy may be at bottom” – Reuters 04/21/09

“Fed sees signs recession nearing bottom” – Reuters -4/15/09

“Global recession not to see bottom till year-end: RBI” –The Economic Times 04/27/09

The smattering of recent financial headlines about whether or not this market has hit bottom is enough to make anyone’s head spin. However, no one seems to be engaging in the obvious discussion: what does a market bottom look like? Let’s start with what a market bottom does not look like. Very rarely does the market just “hit bottom.” To do so implies that we go from a bear market low to a new bull market almost overnight (economists refer to this as a V-shaped recovery). To be fair, a V-shaped recovery occurred in Nov ’38 – Apr ’42 bear market, and to a lesser extent in the Nov ’80 – Aug ’82 bear market. However, V-shaped recoveries are the exception, not the norm.

Since the Great Depression, most bear markets ended after a multi-month, base-building process. A look back into bear market history shows that the base building process develops over four stages…1) Market declines and puts in a bear market low, 2) market rallies sharply from the low, 3) market declines and retests some level of the bear market low , 4) market begins sustainable move to the upside.

To talk about prior market bottoms is really to talk about chart patterns. Chart pattern analysis looks at facts from the past to give us clues for the future. The charts below show the bottoming process of the Dow Jones during several bear markets since the Great Depression. Are there similar trends in these charts from which we can develop hypotheses and estimations about the future? You be the judge.

Our current bear market has been in a base-building process since Q4 2008. The chart pattern below of the S&P 500, since September 2008, has mirrored, almost on a month-to-month basis, the chart pattern of the S&P 500 during the bottoming of the 2000-2003 bear market. If our current base-building process plays out like it has in so many bear markets of the past, then we should soon see a pullback towards our March 2009 lows. The potential turbulence ahead should not be thought of as bad news. The 1973-1975 and 2000-2003 bear markets both saw 14% corrections right before the beginning of their respective new bull markets (CNBC 04/21/09). While it is possible that the S&P 500 retests 666.79, we’re more likely to see a pullback to around 741 on the S&P 500 (our November 2008 low). We shall see. If the pullback is within the range of what we expect, it would mark about a 15% decline off the recent bear market rally highs. A near-term pullback is healthy and should give us a launching pad to start a new bull market.

As past performance is no guarantee of future results, it is important to note that in addition to historical chart analysis, the near-term technical indicators are pointing to a pullback, even though the long-term fundamental picture is improving. As of this writing, the market remains overbought. Additionally, since the beginning of February 2009, the S&P 500 has thrice unsuccessfully tried to close above 870, indicating significant resistance at the 870 mark. Over the last month, insider selling has been at its highest level since the start of the bear market (Bloomberg 04/24/09). By retesting the March 2009 lows, the technicals should become more bullish, which when coupled with an improving economic outlook, should bode well for the market.

In the next few months, investors should be mentally prepared for a correction towards our March 2009 lows. In building the mental toughness which is critical to objective decision making, remember the following points of good news: 1.) A correction towards the March 2009 lows is healthy and fits with the historic trading patterns of a bear market bottom. 2.) You have a money-management team who each and every day is monitoring and managing your portfolio. 3.) Should we move back to 741 on the S&P 500, the stage may be set for a potential 28% rally into year-end. 4.) There hasn’t been a bear market yet from which we have not recovered.

Contact us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0036

**Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Yahoo Finance
History Says Pullback From Stock Market Rally a Solid Bet, CNBC, April 21, 2009
Insider Selling Jumps to Highest Level Since 2007, Bloomberg, Tsang, M. & Martin, E., April 24, 2009
Average Durations of Previous Bear Markets, Dividend Growth Investor, July 14, 2008