3 Signs we’re approaching a Market Bottom
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These indicators can help us identify when we’re approaching a market bottom:
1. The VIX.
Also known as the market’s fear index, the VIX typically reaches levels above 45 in bear markets.
Notably, the highest point for the VIX so far this year was only 37. So if history is any guide, we’re not quite there yet.
In fact, the VIX surged above 80 during the Great Financial Crisis in 2008 and above 60 during the COVID-crash of March 2020.
Often a spike in the VIX is a telltale sign of a market bottom.
2. Key moving averages.
The 200-day moving average represents the average price over the past 200 days and is a popular measure used to spot long-term trends.
Fewer than 20% of equities trading above their 200-day moving average typically signals near-peak pessimism. Today, we’re just above this level with only 20.5% of stocks above that moving average.
However, things can still get much worse.
In 2009 we reached only 1% of stocks above the 200-day moving average and in early 2020 only 3%. That said, these levels are typically very short-lived.
3. Investor sentiment.
Investors are terrible at predicting the future. In fact, they are contra-indicators.
The American Association of Individual Investors (AAII) publishes a weekly report asking investors where they think the stock market will be in six months.
Above-average market returns have often followed unusually low levels of optimism, while below-average market returns have often followed unusually high levels of optimism.
When bears outnumber bulls by more than 30%, investors are abnormally pessimistic. We’re at this level today which may hint that we are near a market bottom.
Parting Thoughts
While it can often feel like the world is coming to an end and nothing but chaos awaits, looking at these indicators and their histories can be a source of hope once one realizes that the readings of today are not unprecedented and that in fact, they’ve historically signaled better days to come.
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