Olivia Pratt
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The deja-vu selloff is reaching a ‘crisis bottom’

The market is heading toward a bullish time of year

McClellan Market Report

A deja-vu selloff

The roots of the recent stock market selloff look very familiar to investment newsletter writer Tom McClellan, and that’s making him very bullish.

By definition, that’s what chart watchers do -- they use history as a guide for the future. They believe that while no two market environments are identical, investors tend to behave the same way when they are driven by similar levels of uncertainty, fear and/or greed.

With this in mind, McClellan, who writes the daily McClellan Market Report, compared in the chart above the market’s latest selloff to one that began in April 2010, which he believes was being fueled by a similar sense of helplessness.

Back then, just as worries about Europe were taking hold, McClellan noted that investors were being shown daily live footage of a BP PLC BP, +1.77% wellhead spewing oil into the water, and no one seemed to have any idea how to stop it.

“The root causes and the nature of each crisis are wholly different, but the effect on the public’s psyche is what is similar, i.e. that there is a crisis, it can’t be stopped, and those in charge don’t have a clue,” he said. “If the psychology really is the same, then that helps to explain why the [market’s] pattern is the same.”

A big difference between now and then, and one that bodes well for investors in the coming weeks, is that the market is currently nearing a time of year that is traditionally very good for stocks, while in 2010, it was heading toward the worst time of year. In addition, McClellan said he’s already seeing the same type of price action and extreme sentiment readings that appeared at other “crisis bottoms.”

McClellan Market Report

Market entering a seasonally-bullish time of year

“The panic over the Ebola crisis appears to be reaching a climax point, and with that climax we are seeing more signs of a bottom for the stock market,” McClellan said. “[This week’s low] might not be the only or last bottom, but with the bullish period of annual seasonality just ahead, the oversold condition should start to get some traction.”

The S&P 500 SPX, +1.29% was up 1.7% in midday trade on Friday. AtWednesday’s close of 1862.49, which was the lowest seen since April 16, the index had dropped 7.4% from its Sept. 18 record high of 2011.36.