Why down may be the new up

When everyone believes the economy can only get worse, you should start to look for a rebound.

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By Carolyn Bigda writer-reporter, Money Magazine

America: Better off and worse off America: Better off and worse off America: Better off and worse off
It's been seven years since the last recession. Times are tough once again, and people are telling us how they're doing.
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(Money Magazine) -- Feeling gloomy? That may be a good sign. Widespread pessimism often suggests that better times are ahead. (After all, once you hit bottom, the only way to go is up.)

So what are the omens pointing to now?

Well, several measures of the current mood seem to say that we're closing in on that perfect dose of misery - but may have a little way to go yet.

The Consumer Confidence Index, which measures household optimism and inclination to spend, has fallen 40%, almost as much as at the end of the 2000 market downturn.

When the index drops that sharply, investors may start to buy - and the market rallies.

Fund flows measure how much money is going into and out of mutual funds. This year investors have pulled more out of stock funds than they've added - $33.4 billion, reports AMG Data Services. That spells fear, often a harbinger of a market bottom.

The Investors Intelligence survey of market newsletters shows that most advisers are now bearish.

But here's the rub: While the bull-bear difference has dropped to - 13.7 (the number turns negative when there are more bears than bulls), technical analyst Tarquin Coe says he won't consider calling a bottom until it drops deeply: below - 20.

Lest you get too happy about the bad news, you should know that demand for equities on the New York Stock Exchange (often a signal of a turnaround) hasn't revived.

Since January it has weakened, says Mark Arbeter, chief technical strategist at Standard & Poor's Equity Research. "Institutions are not putting new cash to work," he says.

Keep an eye on these indicators - and some cash at the ready so you can jump on the next rally.

Ned Davis Research has found that six months after the market's low within each of the past 10 recessions (defined as a significant decline in economic activity), the S&P 500 has, on average, rebounded 24%. In a year the return was 32%.

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