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Issue of the week: Have stocks finally hit bottom?

Some money managers are prepared to say the market has reached the bottom, others are not. Andy Kessler from The Wall Street Journal might have the wisest advice: “I’d say stick wax in your ears and don’t listen t

Time and again since the financial crisis began 15 months ago, stock market watchers have announced that prices have finally bottomed out, said Tim Paradis in RealClearMarkets.com. And time and again, they’ve been wrong. Last week’s terrifying two-day plunge—which drove the Dow Jones industrial average down 872 points to 7,552—seemed to disprove the optimists yet again. But then, over the next two trading days, the market gained 891 points, the largest two-day point gain since 1987. After that, investors dared to think that “the worst of the financial industry’s problems might finally be over,” and that the market’s comeback had begun. “I think it’s a little bit of confidence coming back into the system right now,” said money manager Harry Clark.

We’ve heard that before, of course, said Mark Hulbert in Marketwatch.com. But I’m afraid there may still be dark days ahead. My pessimism is based on what I’m seeing in the many insider investment newsletters that I track. These publications tend to fall into one of two camps. One group recommends buying stocks and holding them, regardless of the market’s gyrations, on the theory that stocks always rise over the long term. The other group tries to “time the market”; they push investors to buy before a rally starts and sell before a decline gathers momentum. In general, “as a bear market approaches its final low, at least a few die-hard believers in long-term buy-and-hold throw in the towel” and convert to the market-timing approach. That hasn’t happened yet. Until I see some true buy-and-hold adherents abandoning the faith, I’m not prepared to call a bottom.

Fair enough, said John Rosevear in the investment website TheMotleyfool.com. “But here’s the thing: This isn’t going to last forever.” And that’s because America is still the world’s greatest exporter—of ideas, at least. “Companies in several Asian countries make components for iPods and iPhones, but the design, the innovation, the idea for the thing” came from Apple. “Which is in California.” So that’s where most of the profits flow, too. As long as American businesses continue to dream up innovative new products that the world wants, the world’s dollars will flow into their coffers. So keep the faith: “The stocks you buy at discounted prices now will bring you a lot of dollars, too.”

But if you buy too soon, said former hedge fund manager Andy Kessler in The Wall Street Journal, you’re asking for a whole lot of heartburn and very little profit. The stock market is sure to be a churning mess in December, as individuals and mutual funds dump losing stocks to gain tax benefits and hedge funds sell stocks to pay off their lenders. The carnage will continue in January, when unsuccessful fund managers are typically fired. Their replacements make it their first order of business to sell the old manager’s holdings and start with a clean slate. My advice? “I’d say stick wax in your ears and don’t listen to the market until February.”

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