Stocks Might Finally Be Near a Bottom

Last Updated Sep 12, 2011 6:29 PM EDT

The Dow has closed below the psychologically important 11,000 level six times in the last month, but from a technical perspective the critical number for investors to watch is 1100 on the S&P 500.

Jeffrey Saut, chief investment strategist at Raymond James, has been saying for weeks he believes the selling stampede that overwhelmed the markets through summer looks to have climaxed back on Aug. 9. What we're suffering through now is just part of the so-called bottoming process, as painful as it may be.

Picture it like this: Overemotional investors started stampeding out of stocks in June. Their panic peaked in early August. Now they're rearing about like skittish ponies trying to find footing in a field of mud.

The good news is Saut's fairly optimistic that the bottoming process (which is always scary, volatile and frustrating) is following reliable historical patterns. That means things should settle down in perhaps as little as two weeks.

One way to tell if the market has truly bottomed out is by keeping tabs on an ETF called the KBW Banking Index (BKX), or BKX, Saut says in his latest note to clients.

"[The BKX] is approaching its Aug. 23 selling climax low of $34.57," says Saut. "If the BKX holds above that low and turns up, it would be a step in the right direction since it is difficult to envision a sustainable stock market rally without the help of the financials [sector]."

If the BKX can hold up then that means potentially good things for the broader market -- as in back to rally mode into the end of the year.

And let us hope that the BKX does indeed reverse course and rise, because the most important technical indicator is that the S&P 500 not fall decisively below 1100.

Should the S&P 500 fall below that level and stay there, it would suggest the rally since the March 2009 lows is over, Saut says. Stocks may not end the year with a thud, but they're a lot more likely to remain a dud.

Either way, these days of wicked volatility and triple-digit dives on the Dow should peter out in a few weeks at most, Saut reckons. At least until the next crisis, that is.

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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.