Has the stock market bottomed? These 14 signs reveal yes and no.
Is a new bull market underway since the Nasdaq regained 23% from its June 2022 lows? Although some articles suggest that there may or may not be a new bull market in the Nasdaq index, other articles suggest that it could be a head fake and what we might be seeing is a massive dead cat bounce and a bear market suckers rally.
These 14 indicators attempt to guess at whether the stock market has bottomed, but it’s hard for anyone to really know. Let me know in the comments what sign you think has the most predictive power.
Video Contents: Stock Market Bottom Signs Intro
-Household Equity Outflows
-Inverted Yield Curve
-VIX (Volatility Index)
-S&P 500 Stocks Above 200 Day Moving Average
-Unemployment, Treasury Yields, Fed Rate Cuts, Profit Estimates
-Put To Call Ratio
-Stock Buybacks, Short Interest
-S&P 500 Forward Price To Earnings Ratio
While most people have felt bearish throughout 2022 (about both stocks and the economy), one contrarian indicator that suggests yes the stock market has bottomed, is the AAII Investor Sentiment Survey.
This survey reached peak bearish levels in April 2022, and the bullish high was in November 2021. The fact that the survey has become increasingly bullish throughout the summer suggests that the markets may have bottomed if the worst is behind us. Although AAII’s Fear & Greed gauge is in neutral territory, it’s tilting slightly toward Greedy as to where investors believe the stock market will be in the next 6 months.
But since households own the majority of the US stock market, the fact that they haven’t yet sold much of the almost $39 trillion of directly held equities means they are the gorilla in the room. Per Bank of America (BOA), we may need to see way more outflows from households like what happened during the Great Recession/Great Financial Crisis before the markets actually bottom (so this sign is a no).
The classic recession sign that has predicted most, if not all, US recessions is the infamous inverted yield curve of US Treasury Bonds. Often an inverting 2 year and 10 year (2Y10Y) yield curve is cited to suggest a recession is looming in the 6-24 months after inversion so that would put a recession as soon as October 2022 or as late as April 2024.
But the more favored inverted yield curve is the 3 month and 10 year (3M10Y) and while this hasn’t inverted yet, it got really close to doing this on August 1 with its narrowest gap of 0.04%. While the 2Y10Y inverted briefly in April 2022, it’s been consistently inverted since July 6.
And in spite of a potential technical recession we may already be in based on two consecutive GDP declines over the last two quarters (Q1 2022 and Q2 2022), perhaps the National Bureau of Economic Research will determine that we’re in a recession in the future.
Although bear markets don’t always accompany recessions, they usually do. And since we might only be in the early innings of a recession, the inverted yield curve suggests that the markets haven’t bottomed yet.
A historical example of this correlation is where the Great Recession started in December 2007 and ended in June 2009, whereas its accompanying bear market started earlier in October 2007 and lasted until March 2009 — starting and ending sooner than its recession did.
However, the technical trading indicator of the Fibonacci retracement suggests that yes, markets have bottomed. People were monitoring to see if the S&P 500 would close above the 4231 level to correspond with a 50% recovery from its June 16 low of 3,666. On August 12 at 4280 it did that as the S&P 500 retraced 50% of its fall from its January 3 high of almost 4800.
The Fibonacci sequence is a logarithmic spiral of shapes that are commonly found in nature such as in nautilus shells or sunflowers, and since humans are very pattern-based, this is why some people were paying attention to this technical indicator.
The next indicator is the Volatility Index with ticker symbol VIX, which shows fear and uncertainty in the market. When the VIX spikes to really high numbers above 45, this tends to signal that the market is about to bottom like when it hit 85 on March 16, 2020. Recently the VIX went as high as 39 on January 24, 2022 and before that 41 on October 29, 2021, which suggests the markets haven’t bottomed yet.
When fewer than 20% of S&P 500 stocks are trading above their 200 day moving average (DMA), this tends to suggest that the market is bottoming and it happened between June 13 until July 22. With about 45% of S&P 500 stocks trading above the 200 DMA on August 12, the markets may have bottomed between June and July 2022.
Per Forbes/BOA, typical market bottom indicators include rising unemployment, a decline in the 2 year treasury yield, the Fed starting to lower interest rates, and a slowdown in profit estimates. The first 3 are no and the last one yes. As of the 3.5% unemployment rate on August 5, we’re at prepandemic levels of employment so this indicator is not yet rising. The 2 year treasury yield generally hasn’t been declining, if anything it’s been increasing and it was at 3.25% on August 12. The Fed is still planning to hike rates in 2022, so the earliest they may cut rates might be in 2023. Finally, though analysts are hesitant to lower profit estimates, companies are increasingly revealing lower profit expectations.
The contrarian indicator of a higher put to call ratio in options market trading volumes would suggest that bearish expectations are on the rise, with puts significantly outnumbering calls. Per Ally Invest, the put to call ratio would need to go above 1.5 like when it hit around 1.8 in early 2020 and in Q4 2018 but we haven’t seen this play out yet. We’re currently at a middle of the road number of the total put to call ratio being 0.92 as of August 11.
JPMorgan believes that since companies are flush with cash, they are doing a lot of stock buybacks or share repurchases. They believe the market bottom is near based on S&P 500 companies having done 45% more buybacks in Q1 2022 than the prior year period.
In addition, there’s the highest level of short interest in the S&P 500 since the corona selloff of 2020, which is another market bottom indicator.
Historically, the markets have bottomed when the S&P 500 Forward Price To Earnings Ratio (PE Ratio) declines to 13 or 14 per the Motley Fool. This happened in early 2020, Q4 2018, and in 2002 after the dot com bubble. It even went below 13 during the 2008-2009 Great Recession. So the fact that the S&P 500 Forward PE Ratio is at 17 means that the markets have not bottomed yet.
To tally the indicator count, there are 8 No and 6 Yes that the market has bottomed, meaning the Nos have it at 57% outweighing the Yesses at 43%.
Which of these signs do you think is or are the most meaningful indicator(s)? Are there more signs that you know of? Let me know! I’d love to hear from you.
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