That’s Right, It’s Time to Get Bullish

In complete contrast to last week’s 5.4% gain, this week’s 7.1% loss (so far) is tied for one of the biggest weekly losses in months. And the bearish riptide has whipped traders into a state of panic. After all, we’re teetering on the edge of new 52-week lows, and it seems as if the masses are certain it’s the beginning of a financial apocalypse.

Before selling all your stocks and sealing the hatch on your bunker though, you may want to stop, take a deep breath, and put this week’s pullback into perspective. The fact is, not only have we seen and survived dips of this magnitude before, we may have actually just seen a short-term bottom.

So Bad It’s Good

Most of the time, the market is quite nominal — average movement, average volume, and an average opinion about its future. Every once in a blue moon though, things go haywire and push stocks to their limit.

Thursday was one of those days. We saw things you may one see once every few weeks, if not every few months. Funny thing about these rare occurrences, though — all of them almost always materialize not at the beginning of pullbacks, but at the end of them.

Take the number of NYSE stocks hitting news lows as an example. On Thursday, 787 NYSE-listed stocks hit new 52-week lows. Normally, it’s closer to 50 NYSE equities hitting new lows on any given day. To see that many names do so poorly is a major hint of a bottom-making blowout.

And yes, there’s plenty of precedence for the idea, and we don’t even have to go that far back to find it. Remember Aug. 8 when the initial plunge of this rout finally found a floor? On that day, 1,306 NYSE stocks hit new 52-week lows – a clear statistical outlier number (see chart below). A week later, the S&P 500 had gained 7.5%.

Fine, but that was a fluke; there’s no way that ‘too many new lows’ can signal a bottom — right?

Actually, there’s an amazing correlation between a surging number of new 52-week lows and major bottoms. We’ve seen the phenomenon several times in the meantime, but the number of stocks hitting new lows back in late 2008 and early 2009 marked a string of major short-term lows, and even flagged the pivot out of the bear market. On, Oct. 24, 2008, 853 news lows set up a 14% run; on Nov. 20, 2008 , 1,514 new lows came in front of a month-long 23% rally; and on March 6, 2009, 853 new lows from NYSE stocks ended up kick-starting a brand new bull market.