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M = Market Direction: How You Can Determine It 219

earnest. This occurred in December 1976, January 1981, and January 1984.
There’s an important psychological reason for this: the majority of people in
the market can’t be exactly right at exactly the right time. In 1994, the Nas-
daq didn’t top until weeks after the Dow did. A similar thing happened in
early 2000.
The majority of people in the stock market, including both professional
and individual investors, will be fooled first. It’s all about human psychol-
ogy and emotions. If you were smart enough to sell or sell short in January
1981, the powerful rebound in February and March probably forced you to
cover your short sales at a loss or buy some stocks back during the strong
rally. It was an example of how treacherous the market really can be at
turning points.

Don’t Jump Back In Too Early
I didn’t have much problem recognizing and acting upon the early signs of
the many bear markets from 1962 through 2008. But a few times I made the
mistake of buying back too early. When you make a mistake in the stock
market, the only sound thing to do is to correct it. Don’t fight it. Pride and
ego never pay off; neither does vacillation when losses start to show up.
The typical bear market (and some aren’t typical) usually has three separate
phases, or legs, of decline interrupted by a couple of rallies that last just long
enough to convince investors to begin buying. In 1969 and 1974, a few of
these phony, drawn-out rallies lasted up to 15 weeks. Most don’t last that long.
Many institutional investors love to “bottom fish.” They’ll start buying
stocks off a supposed bottom and help make the rally convincing enough to
draw you in. You’re better off staying on the sidelines in cash until a new bull
market really starts.

How You Can Spot Stock Market Bottoms
Once you’ve recognized a bear market and have scaled back your stock
holdings, the big question is how long you should remain on the sidelines. If
you plunge back into the market too soon, the apparent rally may fade, and
you’ll lose money. But if you hesitate at the brink of the eventual roaring
recovery, opportunities will pass you by. Again, the daily general market
averages provide the best answer by far. Markets are always more reliable
than most investors’ emotions or personal opinions.
At some point in every correction—whether that correction is mild or
severe—the stock market will always attempt to rally. Don’t jump back in
right away. Wait for the market itself to confirm the new uptrend.