Forecasting the Anatomy of the Market Bottom

Financial forecasts, whether they are fundamentally or technically driven, are a combination of probabilities and assumptions, says the editor of the Technical Speculator, a monthly international investment newsletter.

When an analyst indicates that the earnings for a company are expected to increase during the next quarter and the business is now trading below its intrinsic value, he is suggesting that the probability of a number of issues should positively affect the near-term earnings outlook for this organization.

The assumption is that companies who trade below their true worth will eventually rise up to their intrinsic value. In other words, the fundamental evidence indicates the company is undervalued and the stock price will reflect this by advancing sometime in the near future.

This probability analysis also applies to a technical review. Mathematical models can show where the greatest likelihood of major lows will develop in the future and, coupled with historical data, the time frame for the bottom of the bear market can be estimated.

Bear market bottoms can develop in any of three forms. However, as global equity markets are tightly linked, they typically all reach their lows during the same months and often on the same day. With models indicating that major troughs are expected in June and October this year and another in March 2010, there is a 75% probability that the last bottom of this severe bear market should occur in June or October and with a possible retest in March.

The assumption is that the end will develop this year verses June or October 2010.