This Is How To Tell When The Market Is Bottomed

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Reference ID: #13e487f0-7a83-11ea-9e66-a392cd24a08c

Financial markets
Looking for the bottom

How to tell when markets are cheap

HOW does one tell when markets are cheap? Regular readers will know that this blogger has been gloomy for a while but the trick is to have some cash available so one can follow the old rule of being greedy when others are fearful. The Vix index of volatility has reached 48, the kind of levels that indicate panic. Hedge funds say there is unusually high volume for August and that there are signs of capitulation in the financial stocks, perhaps as value investors exit the sector.

Things are more hopeful in Europe. for the continent as a whole, Andrew Lapthorne reckons the cyclically-adjusted p/e is 12.4; that is still 20% above the 2008 low but it still a lot more attractive than the US. Remember also that many European companies have prospered by selling to emerging markets.

For emerging markets, Morgan Stanley reckons the price-to-book ratio is 1.65. that is below the average of the last 20 years although it’s worth noting that prices fell to book in 1998. For what it’s worth, MSCI reckons the forward p/e of emerging markets is now in single digits.

So there are certainly signs of value outside the US, although the case is not overwhelming. An alternative view is simply that equity markets are catching up with the message that government bond yields have been sending all year, and that has been implied by central bank policy; the developed world economy is still very weak.

Dylan Grice at Societe Generale is one of the top rated strategists in London who has long argued for an overweight cash and long gold position. He thinks the markets are pushing the central banks to monetise the issue; with the Fed indulging in a third round of QE and the ECB loosening the purse strings to buy unlimited bonds. However, he thinks it may take more of an air of crisis before the authorities finally capitulate; perhaps a big European bank in trouble or if French yields start widening towards Spanish levels.

How to identify the first signs of the market bottoming out

Tracking price and volume gives a good idea of the market bottom.

By DK Aggarwal

One of the most complex and daunting tasks for any market participant is to try and determine when the market bottoms out, or reaches a point from where it no longer drops significantly. The market is greatly influenced by macroeconomic factors, policy measures and economic events. So, to ensure if the market has bottomed out is the most difficult task.

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Investing in the market at the bottom and, thereafter, riding the investment with patience can generate very high compounded returns for years to come. So, the question that arises is how to read the first signs of a turnaround. In order to catch the bottom, one needs to first know what a market bottom looks like.

Stocks in any portfolio belong to different sectors, and identifying the sectors to which some stocks belong is a good first step in determining if a stock is near the bottom. For instance, the entire financial sector witnessed a decline during the credit market meltdown in 2008.

Basically, management guidance during earning calls is the first indication as to how a company management perceives future earnings. It is an important indicator of where the company is headed; it gives a broad sense of how its financial performance may look like at the end of the year.

Tracking price and volume gives a good idea of the market bottom. A stock tends to bottom out when there are fewer sellers on that counter. When there are fewer sellers, there are more buyers and they are willing to pay a higher price for that stock. This may cause a stock price to rise.

India has just started seeing a gradual drop in interest rates. The reduction in the cost of borrowing is always of help. However, interest rate cuts effected by RBI have not been enough for the market, which has been languishing due to various factors. The recent announcement of a cut in corporate tax rate for domestic companies and new domestic manufacturing companies by the Finance Minister will certainly help the market bottom out.

Auto numbers can also indicate market trend. Recent auto sales numbers suggest the sector is facing its worst crisis in 20 years and market sentiment has weakened a lot. When these numbers start improving, they will be a sign that the fall in consumption is getting arrested, and it thus giving an indication of bottoming out. In the current situation, however, the festive season will be a clear signal whether the auto cycle is going to reverse or not. Besides a flurry of IPOs, corporate actions and increase in the number of NCD issuances indicate increased confidence of market participants in the stock market.

It is the sincere desire of every market participant to buy at the bear market bottoms, but it rarely happens. The emotion of fear is so influential, the herd mentality is so strong and unconscious herding is so much popular that it becomes impossible to go against the consensus. One can look at any of the above ideas in their search for market bottoms, but it is advisable to look at more than one method for confirmation of such a market bottom.

(DK Aggarwal is Chairman & Managing Director of SMC Investments & Advisors)(DK Aggarwal is Chairman & Managing Director of SMC Investments & Advisors)

Why This May Only Be a ‘Temporary’ Market Bottom

Video Duration: 5:15

Have we hit a bottom yet?

Kenny Polcari, senior market strategist at SlateStone Wealth, weighed in on whether or not this is the real bottom for the market.

Watch the video above for more.

Video Transcript:

Katherine Ross:
There’s a lot of uncertainty in the markets, but luckily I’ve got Kenny Polcari, senior market strategist for SlateStone Wealth with me today. Kenny, let’s start here. Have we hit a bottom? When will we hit a bottom? How are we doing here?

Kenny Polcari:
I think we’ve hit a temporary bottom. I don’t think we’ve hit the bottom yet because I still think there’s this wave that’s coming to United States. It was expected to be here in the next two and a half weeks maybe and it won’t peak probably until maybe even the second or third weekend in April, and so therefore, I still think there’s room for lots of volatility. I do though, think the market had gotten into a way oversold position, and so the bounce yesterday and the bounce today. Listen, it was also assisted by the bounce in oil because if you’re looking, we talk about what’s happened to oil. Oil has gotten absolutely smashed since January. It’s down 67% and the fact that oil really kind of to unravel two weeks ago when the Saudis and Russians couldn’t come to a deal, only exacerbated not only the move lower in oil, but then that dragged equities and everything else with it.

Kenny Polcari:
What was really telling, I think what gave that sense of capitulation, is when you started to see selling across the board in every asset class, including the safety trade. So, treasury started this off, gold was selling off, equities were selling off, oil was selling off, it seemed it was getting to the point where it felt like real panic and real capitulation. And so I think at the moment we’ve hit a temporary bottom. I’d like to say, it is the bottom, and maybe we churn around here for awhile, but I’m not sure that that’s the case because a lot’s going to happen in the next month.

Katherine Ross:
So we’ve hit a temporary bottom. Is now the time for investors to buy or should they wait a little bit longer?

Kenny Polcari:
Well, so again, it depends. We had this conversation and I have it a lot of times with friends and clients, all that stuff. It depends on who you are and what your time frame is and what your outlook is. For instance, yesterday, on a personal note, I added to my portfolio because I found names that I liked, names that are already in my portfolio that to me, were knocking me on the head going, this doesn’t get any better than this at the moment as a longterm investor. So, if you’re somebody that has got 5 or 10 or 15 years, you shouldn’t be concerned at all and someone like you should be contributing to your 401k, should be contributing to a savings account on a regular basis and putting that money to work. You absolutely should.

Kenny Polcari:
But if you’re somebody who’s 60 or 65 years old and you’re really nervous, then you have to figure out what your total picture looks like and where your assets are and then how to kind of make that plan. But I would view, I’m on the side of the camp that says, yes, you should be a buyer here. Even if it goes low, it doesn’t mean take all the cash you have and buy it today. It’s not what I did at all. I’m kind of dipping my toes in the water and I’m waiting to see. So today the market’s up. I’m sitting back not doing much, happy with the purchase I made yesterday and then we’ll see what happens over the next week.

Katherine Ross:
Hey millennials, listen up. Kenny, can the-

Kenny Polcari:
Hey millennials, listen up.

Katherine Ross:
Can the global stimulus plans that we’ve seen really prop up the markets cushion suffering and industries or should the focus, and frankly the dollars, be going towards fighting that virus? Is that a better use of these stimulus dollars?

Kenny Polcari:
So, I think the efforts by every central bank sends one message and that’s a message of support, and that should be a message of trying to calm the markets, trying to calm people down that the feds and the central banks and the governments are going to do whatever they can because we’ve heard that word now, that’s a famous Mario [inaudible 00:03:47] comment from the financial crisis. They’re all doing whatever it takes. And I think in that sense, it should send the message to the world and to investors that the governments and the central banks, they’re supporting it. Now look, we’ve talked about this, too. Central bank monetary stimulus plans are not going to cure the virus. The virus is one issue. The fed moves are another issue just in terms of kind of calming down the hysteria around the world falling apart.

Kenny Polcari:
The banks aren’t going to let that happen. The central banks are not going to let that happen. Now, from a government perspective, all this stimulus to fiscal stimulus, the plans to buy out, the plans to support industries, the plans to send cash to every American, that’s happening in countries really around the world. I think all that stuff is also going to try to make people calm down. Although I’m not sure that that’s actually working. And I think certainly in the United States, even though we’re working hard with those kinds of plans, we haven’t gotten hit with it yet. And so, I think we really have to wait until April to see how people react. I’m in the camp that let’s take a deep breath. Let’s just sit back. If we do what we’re told and we shelter in place, then this too shall pass.

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