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.