Do Big Point Gains Mark Major Market Bottoms?

• By Simon Maierhofer
• On Wednesday October 29, 2008, 11:36 am EDT

This article is an excerpt from ETFguide's ETF Profit Strategy Newsletter, a subscription based publication.

After the Dow's (AMEX: DIA - News) 936 point rally on Monday, September 13th, we published this article in the ETF Profit Strategy Newsletter. It seems appropriate to revisit this subject as the Dow enjoyed another 889 point rally on Tuesday.

The 104 point gain (September 13) and 91 point gain (Tuesday) also represent the biggest point gains on record for the S&P 500 (AMEX: SPY - News). The Dow Jones Wilshire 5000 Index (AMEX: TMW - News), a representation of the entire U.S. stock market, gained about $1.2 trillion each of those days.

For Wall Street, those 11% gains came not a moment too soon. The first few days of October wiped out $ 2.4 trillion of shareholder wealth. From the Consumer Staples Select Sector SPDRs (AMEX: XLP - News) to the Financial Select Sector SPDRs (AMEX: XLF - News), all sectors slid to new lows.

The higher-beta indexes appeared to be leading the way to the downside, as the Nasdaq (Nasdaq: QQQQ - News), the iShares S&P 600 (NYSEarca: IJR - News) and the iShares S&P 400 (NYSEarca: IJH - News) declined beneath their respective October 10th lows before bouncing back on Tuesday.

Even the DJ Wilshire 5000, the broadest aggregate measure of stock market behavior breached its October 10th low. The Dow Jones Industrial Average and S&P 500 have resisted thus far. It would make for a better and cleaner (short term) technical picture if ALL main indexes fell below their October 10th lows before starting a counter trend rally.

A look at the bigger picture reveals that seven of the ten biggest percentage gains occurred during the Great Depression. Six of them were mere bumps on the Dow's way down. On average, the Dow declined another 60% after each bounce before the bottom was reached (see chart).

The biggest gain, 15.34% on March 15, 1933 marked the bottom of the 3 year carnage. A 10.15% bounce on October 21, 1987 occurred within 10% of the 1987 low.

Investors back in the 1930s did not have the luxury of short ETFs. We've been able to rack up huge gains (admittedly smaller after yesterday) in sector short ETFs such as the ProShares UltraShort Financials (AMEX: SKF - News), ProShares UltraShort Real Estate (AMEX: SRS - News), ProShares UltraShort Consumer Services (AMEX: SCC - News) and ProShares UltraShort S&P 500 (AMEX: SDS - News).

The market will tell us where the bottom for the U.S. stock market is. It always expresses itself, you just have to know how to interpret the signs. We'll discuss this further in our ETF Profit Strategy Newsletter.