We stand by the adage that nobody rings a bell when markets hit bottom. And overly eager investors can compound bear-market losses by embracing phantom bull markets too soon. Nonetheless, some signs indicate that a market turn is imminent, if not already here.
Jim Stack of InvesTech Research looks for a declining number of stocks hitting 12-month lows on the New York Stock Exchange. At market bottoms, fewer than 25 stocks are hitting new lows, and within the first month of a bull market, the number dwindles to fewer than a dozen. The good news is that the number of stocks hitting new lows has come in below 25 a few times of late.
The eyes of many seers focus on the VIX index, which measures the volatility of options on Standard & Poor's 500-stock index. Record-high levels indicate extreme fear, which is when bottoms occur. The VIX was recently as high as 32.24 not quite as lofty as levels that heralded the ends of previous bear markets or corrections in October 2002 and August 1998 but close to the reading in October 1990.
With even the head of the Federal Reserve admitting that we may be in a recession, it's crucial to remember that stocks anticipate turns in the economy. Since World War II, stocks have bottomed about six months into a recession, on average, says Steve Leuthold of the Leuthold Group. By his reckoning, a recession began last November (recessions, like market bottoms, are only confirmed in hindsight).
From the bad-news-is-good-news department, the collapse of Bear Stearns may augur well for the market. A recent report from JPMorgan Securities (coincidentally, a unit of JPMorgan Chase, which is buying Bear Stearns) notes four such failures in the past 25 years, ranging from Continental Illinois Bank, in 1984, to the Long-Term Capital Management hedge fund, in 1998. After each of the failures, the S&P 500 was up an average of 10 percent after six months and 17 percent after a year, turning higher within two to 15 days of the event.Another contrarian indicator is pervasive bearishness among investment advisers. The rationale is that the market is due for a turn when sentiment reaches one extreme or the other. A recent poll of advisers by Investors Intelligence, a New Rochelle, N.Y., research outfit, found that 43 percent were bearish and only 31 percent were bullish the most bearish sentiment since the October 2002 market bottom and a convincing sign that the last of the bull-market holdouts had given up. After all, when the bears have no one else to convert, the market has nowhere to go but up.
Anne Kates Smith is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected]