The bear market appears to have bottomed out. All of the previously ignored unfavourable aspects are now fuel for fresh, way-too-late warnings, as is customary. Embarrassing figures, tables, and charts back up the negative. The problem is that this is how selloff bottoms seem when buying chances are plentiful. That implies now is the best time to invest.
Couldn’t there be another selloff next week?
Of course, it’s possible that it won’t. So, which path should we follow? Should you wait for lower prices or take advantage of the current low prices? When a confluence of indicators occurs, like it is today, experience tells that the best way is to “just do it.” To successfully achieve the “buy low” goal, you must refrain from seeking to “buy lowest.”
There is a compelling motive to act this week. The preliminary University of Michigan’s CPI reading for April (Wednesday, May 11 at 8:30 a.m. ET) and the BLS CPI reading for April (Wednesday, May 11 at 8:30 a.m. ET) are two Another sign of a market bottom is a high correlation between stock movements. The following vital information was added to a Wall Street Journal article about the Bausch & Lomb IPO (underlining mine):
“In recent months, correlation between individual companies in the S&P 500 has risen considerably as fears of increasing interest rates sparking a recession have led to widespread selling….
Here are a few numbers that may seem alarming, but they also represent potential. (All information is current as of Friday, May 6.)
First, the distance between each index’s 52-week high and the potential return if it fully recovered.
- S&P 500 – down 14% (recovery = 16% increase)
- Dow Jones Industrial Average – down 11% (recovery = 13% increase)
- Nasdaq Composite – down 24% (recovery = 32%)
- The Nasdaq 100 is down 23% (with a 30% comeback).
- Second, the vast number of equities that are down 20% or more from their 52-week highs, as well as the percentage of stocks that are down 20% or more.
- S&P 500 – 258 of 500 (52 percent )
- 12 of 30 Dow Jones Industrial Average (40 percent )
- 1083 of 1691 Nasdaq Composite (at least $10 per share; excludes funds and SPACs) (64 percent )
- Nasdaq 100 – 62 of 100 companies (62 percent )
The third factor is the disparity between new year-to-date highs and new lows:
- NYSE (32 vs 394)
- Nasdaq (39 vs 895)
Fourth, there is a small fraction of equities that are above their 200-day moving average trend lines:
- 43 percent for the S&P 500 (low, although above previous lowest)
- The Dow Jones Industrial Average is down 35%. (low, although above previous lowest)
- The Nasdaq Composite is down 13%. (matches lowest)
- Nasdaq 100 is down 19%. (matches lowest)
Fifth, as of Tuesday, May 3 (before to the Federal Reserve release and ensuing whipsaw market movement), the Investors Intelligence US Advisors Sentiment Report’s readings –
Bearishness = 39.3% (comparable to 2018 bear market and 2020 Covid selloff readings)
Bottom line: Take advantage of the current stock market downturn.
Stocks have dropped considerably in the last five months. Consider the months of November and December, when they were at their peak. The mood was upbeat, the news was good, and development seemed certain. The few bad aspects that were beginning to emerge caused little alarm. Selling at that point would have met the goal of “selling high.”
Today we are witnessing the reversal. Stocks are at all-time lows, owing to the unfavourable factors that are now extensively addressed. The positives are overlooked. Add in the frayed nerves caused by the downward trend’s instability over several weeks. Clearly, this is a “buy low” opportunity.
So, from now on, be optimistic about future developments and expect Wall Street, and then stock investors, to find the silver linings.