The bear market looks to have reached bottom. As usual, all the negative issues that had been downplayed previously are now fodder for new, way-too-late warnings. The negativity is being supported by ugly numbers, tables and charts. The problem is that’s what selloff bottoms look like, when buying opportunities are at their best. And that means now is the time to buy.
But, couldn't next week have another selloff?
Of course, but it also might not. So, which route should we take? Hope for lower prices or act now and lock up the low prices currently available? Experience shows the best approach is to “just do it,” when a confluence of indicators occurs like now. Accomplishing the "buy low" objective successfully means not attempting to "buy lowest.”
There is a special reason to act in the coming week. Two watched-for reports are coming: the BLS CPI reading for April (Wednesday, May 11 at 8:30 AM ET) and the preliminary University of Michigan's Consumer Sentiment Survey results for May (Friday, May 13 at 10 AM ET). What's unique this time around is that whatever the results, they will provide buying support - either from a relief-giving positive reading or a tiresome negative that is viewed as bound-to-change.
And there is one more indicator of a market bottom: High correlation among stock movements. The Wall Street Journal added this important information to an article about the Bausch & Lomb IPO (underlining is mine):
“Correlation between individual stocks in the S&P 500 has risen dramatically in recent months as fears that rising interest rates could spark a recession lead to across-the-board selling....
“Over the three months before technology stocks started falling in December on inflation and interest rate fears, the average stock moved in the same direction as the S&P 500 39% of the time, according to Ned Davis Research. Since then, that has jumped to 61%.”
“Across-the-board” selling means wholesale dumping to remove stock market exposure. The driving force might not be panic, but it certainly is stock market pessimism.
Next: The ugly numbers that indicate a market bottom
Here are the many numbers that appear worrisome, but also represent opportunity. (All data as of Friday, May 6.)
First, each index’s distance from its 52-week high, along with potential return if it fully recovered
S&P 500 - down 14% (recovery = up 16%)
Dow Jones Industrial Average - down 11% (recovery = up 12%)
Nasdaq Composite - down 24% (recovery = up 32%)
Nasdaq 100 - down 23% (recovery = up 30%)
Second, the large number and percentage of stocks down 20% or more from their 52-week highs
S&P 500 - 258 of 500 (52%)
Dow Jones Industrial Average - 12 of 30 (40%)
Nasdaq Composite (share price of at least $10; excludes funds and SPACs) - 1083 of 1691 (64%)
Nasdaq 100 - 62 of 100 (62%)
Third, the imbalance between new year-to-date highs versus new lows:
NYSE (32 vs 394)
Nasdaq (39 vs 895)
Fourth, the low percentage of stocks above their 200-day moving average trend lines:
S&P 500 - 43% (low, although above previous lowest)
Dow Jones Industrial Average - 35% (low, although above previous lowest)
Nasdaq Composite - 13% (matches lowest)
Nasdaq 100 - 19% (matches lowest)
Fifth, the Investors Intelligence US Advisors Sentiment Report’s readings as of Tuesday, May 3 (prior to the Federal Reserve report and subsequent whipsaw market action) -
Bearish = 39.3% (comparable to 2018 bear market and 2020 Covid selloff readings)
The bottom line: Take advantage of this stock market negativity
Over the past five months, stocks have fallen significantly. Think back to the November/December days when they were at their highs. The mood was optimistic, the news was positive and growth seemed assured. There was little concern about the few negative issues that were beginning to show up. Selling then would have accomplished the objective of “sell high.”
Today we are seeing the flip side. Stocks are at their lows, having been driven down by the negative issues that now are widely discussed. Ignored are the positives. Add to that the rattled nerves from multiple weeks of volatility surrounding the downward trend. Clearly, an opportunity to “buy low.”
So, from now on, be positive about future developments, and anticipate that Wall Street, then stock investors, will once again see the silver linings ahead.