When it’s time to buy, you won’t want to. This is precisely what makes successful long-term investors so difficult for so many people. Catching the bottom of a bear market is among the hardest things to do, and it’s not due to a lack of research and technical tools.
In a time when there are charting tools galore and plenty of research hubs online, anyone can get the latest information on their phones nowadays. While some insiders may have access to information sooner than the rest of us, that gap is closing as the data flows faster.
There’s no specific quantitative gauge that will tell you when a bear market has bottomed out and the buyers are ready to step in. If such a numerical gauge existed, people would figure it out and use it, and then it wouldn’t work anymore. Thus, a “market bottom indicator” really can’t exist for very long.
It is notable, though, that the VIX remains at low levels despite all of the warning signs in the U.S. economy. As a refresher, the VIX or Volatility Index is basically a gauge of how fearful investors are at any given moment.
When the markets are calm and stocks are moving up gradually, the VIX might be at 15 or 20. Occasionally, the VIX will get down to 10 or even into the single digits, like it did in 2017. This is a sign of extreme complacency in the financial markets, and probably not a great time to buy large-cap stocks.
In contrast, when the VIX starts to go above 30, there’s fear in the market. Sure, the VIX could go to 50, 60, or even higher, but it doesn’t stay there for very long because people can collectively be extremely fearful for so long.
It might surprise you to know, then, that the VIX was below 25 just a couple of days after Federal Reserve Chairman Jerome Powell basically told the financial markets that it has no intention of backing off of steep interest rate hikes anytime soon.
On Wednesday, Powell said it was “premature” to talk about pausing rate hikes, and that the Fed “still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
The major stock market indexes tanked after Powell said those things, but the VIX didn’t go anywhere near 30. Since VIX futures traders are typically more sophisticated than retail stock investors, this suggests that the smart money doesn’t believe we’ve reached a market bottom yet.
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They’re probably right about that. True market bottoms don’t just involve a quick fear spike; they require absolute capitulation. Look for a day, or perhaps a few days, in which all of the major stock market indexes (S&P 500, Dow Jones, NASDAQ, and Russell 2000) fall off of a cliff at the same time.
It needs to happen on trading heavy volume, with both institutional and retail investors panic-selling in tandem. Usually, the hedge funds will dip-buy whatever mega-cap stocks the amateurs are selling; in a true bottoming process, however, “buy the dip” gives way to “run for the exits.”
And, those exits become crowded to the point where not everyone can easily get out. You might actually see liquidity dry up in large-cap stocks when there are too many sellers and not enough buyers. Bid-ask spreads will widen to the point where it’s hard to get your orders executed at a reasonable price.
When there’s truly a bottom in the market, you’ll get that “Haines moment” like what took place on March 10, 2009, when analyst Mark Haines correctly called the market bottom of the financial crisis.
At that time, Haines boldly predicted, “I’m going to step out on a limb here….I think we’re at a bottom. I really do.” It felt like the world was ending and stocks would never stop falling. Hardly anyone believed Haines, a lone voice during a desperate time.
Keep your eyes peeled for that “Haines moment,” when almost no one believes that things will get better. Look for capitulation, heavy selling volumes, and despair. And, if you dare, be your own Haines and dare to say what the “experts” refuse to believe – and then, consider buying distressed assets at amazingly good prices.
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