It has been difficult as of late to look at the stock markets for people who have money in it. To date 2022 all US major indexes have fallen more than 20% which quantifies current year as a bear market. Yet if we look at a bigger picture on average each year stocks gain around 9.8% annual over the span of over a 100 years.
(Courtesy of awealthofcommonsense.com)
So the million dollar question is when will the current stock market drop end? Over the years I have seen some patterns and numbers that has proven to show signs of market tops and bottoms. Today we look at some of these indicators and what they mean.
AAII Sentiment Survey was started in 1987 and is a survey for current investors in the market on what they expect in the upcoming six months of the stock market. The survey results come out every week and accumulated chart below:
(Courtesy of Sentiment Trader)
The current survey has a rating of 60.9% of participants bearish for the upcoming six months in stocks. This is only lower than March 5, 2009 percentage. For those who are not aware during the Great Financial Crisis markets bottomed on March 9, 2009 which was a Monday and from there never looked back since.
The point here is AAII sentiment can reveal the excessive bearishness leading to potential reversals. With stocks dramatically down it is understandable that the sentiment is mostly bearish. However at extreme cases such as that of March 9, 2009 and may likely be of current 2022 it may appear markets are closer to a bottom than continuous price free fall.
Another survey correlating to market sentiment but based on fund manager's purchase or not purchase of the S&P is the NAAIM index. The lower the number and closer to zero means fund managers bearish on S&P and the higher the number that is close to 120 means fund managers bullish on S&P.
(Courtesy of ycharts.com)
Since its creation in early 2000 only a handful of times had the index drop below 10. In all those instances below 10 the S&P found a bottom. As of today the index hit a low of 12.16 for the year however today it closed at 38.11. We should keep an eye out on this number as it is updated weekly to see if it ever goes below 10 again. The potential of a market bottom maybe a a lot closer than we think with these sentiments.
(Courtesy of Sentiment Trader)
Not often do we see insiders selling dwindling but as of late this is the case. With less selling pressure gone what would create a bullish case for stocks is traders who pick the opposite side of the trade. This is to say those who are betting on further stock decline are also at an excess high relative to past years. The sentiment being bearish and the rate of trades being bearish is out weighting the bulls. In the long run things will capitulate and prices will move the opposite of the majority which in turn create price squeezes and in this case prices to the upside.
(Courtesy of Bank of America)
In every case where the stock market had fallen 20% or more there has been a bounce back and markets reaching to new all time highs. Lets take a look at a statistic from Carson:
Fourth quarters of markets have a tendency to be strong. At the beginning of this week it was beginning of October and markets rose significantly in the first two days of the week. Of course we knew how that ended for the week however if we look at it on a longer time frame it appears the market is well on its way to potentially finding a bottom and have a solid recovery for the following year.
Bottom line is there is enough evidence for us to start watching the markets to see if a bottom in price will come soon. On days where there seems to be extreme selling and lower lows it maybe a sign of capitulation. It is worth noting past results do not mean future will be the same. Therefore although we looked at the multiple indicators shown in this post the reality is bears are still in control and if you are trying to buy the dip you have to be cautious.
None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!
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