Ways to tell the market is bottoming out

No one can predict the top or bottom of a stock market, or in fact any other market. But, there are a couple of interesting ways that generally indicate the bottom pretty well.

A good thing about these indicators is that they have nothing to do with technical analysis or numbers, instead, they focus on how people behave.

1. Market goes up on bad news: Jim Rogers talks about this a lot, and he says – when the market goes up, even, on bad news – that is a good indicator that the bottom is close.

This is exactly what happened on Friday 5th December 08, when, the unemployment numbers for November 2008 were announced in the US. The economy lost 544,000 jobs in a single month, and it was the worst month since December 1974. But the stock market went up that day – Dow, up 3% to close at 8,635 and Nasdaq, up 4.4% to close at 1509.

Since we are still in the middle of the current market fall, it is too early to say whether the market has bottomed out or not. But, we will know the answer in the next few months.

2. People don’t want to talk about the stock market. In his book – One Up On Wall Street – Peter Lynch presents his “Cocktail Theory”. A part of the theory is that – when the market has been down for a while, and no one is talking about stocks – that is a pretty good indicator that the market has reached its bottom.

He takes a very witty example, and says that when people would rather talk to dentists about plaque, than, talk to him about stocks – that’s a good sign that the market is reaching a bottom.

This is also true of the current market. People, today, will much rather talk about plaque than stocks.

Both the indicators point to a bottom, but only time will tell, whether these indicators were correct or not.

10 thoughts on “Ways to tell the market is bottoming out”

  1. Thanks Rob, it’s interesting to get different views on investing, and especially on investing in different assets. I can see where you are going with the problem of unknowns.

  2. With long term horizons, stocks and bonds are really the safest bet. The good thing about companies is the amount of data they have to disclose over time, so you can keep yourself informed on the health of your investment. There is risk, but it is less than what you see in commodities.

    The problem with commodities is that you are facing more unknowns. You can see the level of supply and demand yesterday, but there is a great deal of factors that can effect both supply and demand on a long term scale that can’t be predicted. A lot of the time you are facing the unknown of resource finds and technology. It is impossible to know how many new deposits of resources will be found and it is impossible to know what technology will either make a resource less needed or cheaper to supply.

    Its really a matter of what type of risk and return you want, which the ranking is fairly obvious for most situations. Bonds should be the longest term investments, and are very good for times like these to keep money safe for later buying cheap stocks. Stocks should be used for investments over several years. Commodities are normally safe within a year horizon. Direct currency trade is made available as a high leverage option that should only be with small amounts of money for short time periods. It is the highest volume of trade with the most possible factors to consider in any market I’ve seen, so it will move the fastest and be the hardest to predict.

  3. Thanks Rob, I am really looking to hold something long term. My investment horizon has usually been five years or so with stocks and a few metals that I own.

    Do you think the horizon should be different with commodities?

  4. Be careful with picking up currencies. They do not act like commodities or stocks, so you shouldn’t be picking them up for any period longer than a week in most cases. A 400:1 margin sounds amazing, but it can cause you to see your money half in a matter of minutes.

    To keep currency from becoming like gambling, I would suggest calculating out a max trade limit for yourself that is closer to 10:1, focus on investments over a one day to one week period to avoid reversals.

    You also need to realize the currency is worth what it can buy unlike commodities or stocks that are tied to the value of a specific set of assets. When stocks are cheap in a country and bargains abound, you will actually see the currency for that country gain in value as opposed to losing value with its economy. For this reason a coming stock crash should have you invest in that countries currency, and a coming stock boom should have you get out as soon as possible.

  5. I just went through the list, and 95% of them seem to be banks, and the other 5% related to finance in some manner or the other.
    That explains it I guess.

  6. That is an interesting piece of analysis Vilkri….I wasn’t aware of it. Do you happen to have a link please?

    Personally I have started accumulating stocks since the great slide. Now thinking about a few currencies and commodities.

  7. Stocks have become pretty cheap, too. According to a Bloomberg report, the market cap of 2,267 companies around the globe exceeds the current value of the equity and liabilities. Therefore, future profits are offered to investors for free. These 2,267 companies are “eight times as many as at the end of the last bear market, when the shares rose 115 percent over the next year”.

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