Wall Street Tumbles 4%: Has the Market Hit Bottom?

Jeff Macke

Another rough day for stocks as a feared escalation in Europe's debt crisis skipped the pond and hit the U.S. markets hard. The Dow Jones Industrial Average fell 4.6% closing at 10,719 and the S&P 500 sunk 4.4% to 1120.

It would be nice to call the bottom of the Summer of 2011 market meltdown. But confidence is key and there's too much uncertainty out there, making this the key debate on Wall Street right now: Has the market hit bottom?

I'm pulling for the Bullish camp - the side that will hopefully look back and declare yesterday, Tuesday August 9th at 2:42pm EDT, stocks made their lows for 2011. For those scoring at home, the levels were 10,674 on the DJIA and within spitting distance of 1,100 on the S&P.

At that exact moment the fear was palpable, the Fed Statement with its negative implications for the economy through 2012 was digested, and stocks were some 7% off their opening levels of Monday. The market looked into the abyss and found it's soul. As it turns out, the market's soul was a buyer of stocks, in size. Starting at 2:43 EDT on Tuesday, stocks exploded higher putting more than 6% between the lows and the 4:00pm close.

Of such moments and reversals are market bottoms made. To debate the point, Matt Nesto and Aaron Task of the Daily Ticker joined me for a Financial Summit. Their list of fears is as familiar as it is harrowing.

Here's why the Bearish camp believes stocks will move lower:

* The fear still isn't bad enough. The VIX (^VIX) topped 40 today. But for market vets such as Nesto, 40 is nothing. Volatility has plenty of room to run higher.

* Traders are still being tactical; buying levels like S&P 500 1,100 and trying to get footholds for long strategies. Two previously critical support levels - 1,250 and 1,140 on the S&P - held for a blink and collapsed. And 1,100 is no different.

* There's no catalyst to drive us higher. Broad awareness that the financial system is in peril isn't the same as a reason to buy.

* The European financial system is crumbling. Financial stocks are getting buried as a result but they can still fall more as the snowball expands. As is the case for all equities, and as was proven with Lehman Brothers in 2008, the bottom is $0. The financial stocks won't go down alone.

* The US banking system isn't much better off than Europe.

* The European and US financial systems' problems intermingling is a problem too hideous to even contemplate.

The boys make a compelling case. You may hear lofty bullish cases with ratios and theoretical bottom signals elsewhere. The truth is, there isn't a trading paradigm fitting this particular panic. People on both sides are making their best guesses. Nobody knows when the correction will end. Anyone who says otherwise is either lying or selling you something you really shouldn't buy.

As I always say, you can try anything you want as long as you have an exit plan. I'm trying to buy stocks a little bit at a time with a stop-loss level of just below 1,100 on the S&P 500; the lows of August 9th. Unless and until we take out those lows, I'm targeting this as a bottom.

Let us know what you think in the comment section below.

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