There is a great deal of speculation over whether this market has yet reached bottom. I would say that we have reached "a" bottom, but we have not reached "the" bottom. Some of the reason for my thinking can be found in the chart below.
If we look at the most recent lows, we can see that the S&P 500 made a closing low for the week of March 14 that was 2.8% below the closing low for the week of January 18. At the points in time, the 14-period RSI of this index reached an equal low. Some people might call this a bullish divergence. I do not find it to be a particulary inspiring one. In fact, I find myself wondering if the closing low set on March 14 was simply "Wave b" of an expanded flat formation. It suggests to me that further downside may lie ahead.
If we look back at the closing highs of December 15, 2006 and February 16, 2007, then we can see a far more dramatic RSI divergence. The subsequent sell-off lead to a great deal of angst, but did not mark the end of the bullish formation. The peaks that formed between the highs of July 14 and October 12 were far more pronounced, and came with a definite deterioration in the overall relative strength of the S&P500.
Such RSI divergences are not necessary for us to reach a bottom in this recent bear market. Nevertheless, this is but one reason why I am not terribly enthused by the recent rally in the equity markets. There simply remain a great deal of relative weakness in the markets. I will admit to buying some financials and industrials for long-term investments on the weakness in March, though I am not concerned if those particular actions result in short-term losses.
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