VOT Research Desk
Market Insights, Considerations & Analytics
Bonds are experiencing their worst year ever, while the Dow, S&P 500, and Nasdaq are all buried in bear markets.
A sentiment-based indicator has repeatedly identified excellent purchasing opportunities over the past 20 years, despite the fact that no gauge is perfect.
Now appears to be a great time for long-term investors to invest money.
This utterly unnoticed indicator has traditionally signaled to investors that they should make a move.
The investing community has faced numerous difficulties this year. The timeless Dow Jones Industrial Average (DJI 2.47%), widely followed S&P 500 (GSPC 2.37%), and innovation-driven Nasdaq Composite (IXIC 2.31%) have all fallen into a bear market since reaching their distinct all-time highs between mid-November and the first week of January. Bonds delivered what may very well be their worst year ever, so the bond market hasn’t exactly been a safety net.
If there is any positive thing amid current market turmoil, it is that every significant loss in the main U.S. stock indices has always been an opening for prudent investors to purchase. But this doesn’t alter the fact that investors are anxious and wondering when the bear market will bottom due to increased volatility and the growing likelihood of a U.S. recession.
Several indicators point to the stock market declining.
We’ve highlighted a few indicators that have been very effective at predicting prior bear market dips over the past few months.
For instance, there is a remarkable correlation between unsettled margin debt and bad markets. Margin debt is the sum of money borrowed at interests from brokerages to buy or sell securities short. Rapid increases in margin debt are frequently an indication of increasing risk-taking on the side of investors, which is worrying news for the stock market.
The stock market peaked shortly after in each of the three instances since the start of 1995 where margin debt soared higher by 60% or more in a trailing-12-month (TTM) period. For each of the last two bear markets, the bottom was signaled by a drop in margin debt of more than 40% on a TTM basis (2002 and 2009). There may still be further downside since the TTM fall in unpaid margin debt is currently just over 20%.
Market capitalization indicators have indicated that further decline is also likely. Since 1870, five bear markets have been correctly anticipated by the S&P 500 Shiller price-to-earnings ratio, also known as the cyclically adjusted price-to-earnings ratio, or CAPE ratio. A Shiller P/E of 22 marked the bottom for several prior dual percentage falls, which is more significant. The Shiller P/E as of today is still higher than 27.
Furthermore, with a forward price-to-earnings ratio of the S&P 500 remains slightly higher than the combination of 13 to 14 that has indicated the bottom for a series of market corrections over the previous 25 years.
In our opinion, good viable sign for identifying bear market bottoms isn’t any of the aforementioned ones, though.
To be explicit, no method exists that can predict bear market depths with 100 percent accuracy. If there was, you can be sure that everyone would be adopting it by now, even Wall Street pros and regular investors. However, during the previous 20 years, this specific metric has proven to be highly effective on double percentage decreases. I’m referring to examining the proportion of Nasdaq Composite equities that are moving beyond their 200-day moving average.
Technical analysts who think that the average price of a stock over a specific time period offers some type of assistance employ moving averages. However, We are not considering this indicator in this context. Instead, I’m measuring investor mood by the proportion of stocks in the index (Nasdaq) that have driven the market higher and lower over the last 25 years.
In the past, bull markets have been characterized by investor overconfidence, which has caused valuations to skyrocket. Similarly, during brief periods of pessimism, they might overshoot to the downside and turn excessively bearish. This indicator aids in identifying when those pessimistic peak periods occur and serve as a cue for investors to act.
There have been six occasions in the past 20 years where 12% or less of all Nasdaq-listed equities have been above their 200-day moving average. This incorporates the bottom of something like the dot-com bubble in 2002 (12.12%), the bottom of the Great Recession in 2009 (5.23%), the first quarter turnaround in 2016 (11.29%), the fourth quarter reversal in 2018, the bottom of the COVID-19 disaster (7.01%), as well as the bottom in June 2022 (8.81%). A value of 12% or less has historically signaled a fantastic buying opportunity and has fairly closely predicted the majority of bear market bottoms, even if it is impossible to predict with any degree of accuracy where this metric will bottom.
Here’s why buying equities in down markets is a brilliant move:
However, simply because I’ve been paying close attention to this market correction bottom indicator doesn’t imply A lot haven’t been regularly investing money during this slump. This is due to the fact that historically, an investment opportunity exists during any market loss of a double-digit proportion, at particular for protracted investors.
Every year, market analytics firm Crestmont Research releases the S&P 500’s rolling 20-year total returns, which include dividends are paid. As an illustration, the years 1978 through 1997 would be included in the rolling 20-year total return for 1997, together with all dividend payout.
Crestmont has assessed every multiyear holding term for the S&P 500 since 1900 in total, looking at 103 end years (1919–2021). The most important conclusion is that no rotating 20-year period has ever had a minus total return. There are about 40 ending years where the average annual total return over two decades was 10.9% at the very least, compared to the few end years that had an annual average total return of 5% fewer over 20 years, which can be counted on one hand.
You’re a genius if you’re investing during this protracted bear market downturn because investors have historically reaped huge rewards for their perseverance.
