The prolonged rise of the US stock market is over. And we started the year with an impressive selloff. However, the worst may be yet to come. So, how far down is the stock market bottom? CNBC notes that the worst may not be over for US stocks.
Things haven’t gotten bad enough to get good again.
That’s the paradoxical zone in which stocks find themselves, according to some market-watchers. Despite a dramatic (and deep) decline to start off 2016, an absence of the type of panicky selling that so frequently marks a bottom may suggest that the worst is not over for equities.
“There are three reliable signs of a market bottom, where things get so bad it is safe to step in,” Convergex chief market strategist Nicholas Colas wrote Friday.
“First, when the S&P 500 drops 5 percent or more in one day. Second, when the CBOE VIX Index tops 40. And third, when everything sells off for a few days and correlations for all equities approaches one,” Colas added. “None of these events have yet occurred. And so we wait…”
The problem for stock traders is trying to call the absolute bottom, what one analyst calls a fool’s errand. Nevertheless, calling the bottom within a few percent would be sufficient to gain impressive profits. What are the factors that will determine market bottom, aside from the panic of the market?
Oil, Yuan and Hopes of More Stimulus Measures
Stocks edged higher in the short term due to three factors. CBS Money Watch writes about three factors that boost global stocks in the short term.
World stock markets were mostly higher Tuesday as a strengthening yuan and hopes for more central bank stimulus gave investors relief from the mauling that markets have suffered so far this year.
Also, a tentative offer by Russia, Saudi Arabia, Qatar and Venezuela to freeze oil production at January levels gave oil prices a boost. The offer would only take effect if other oil producing countries followed suit, Russia’s energy ministry Alexander Novak said following a meeting in Qatar.
Our opinion is that China’s economy has a much longer road to go before it settles into a new normal more closely resembling growth rates of North America and Europe than the spectacular growth of decades past. Markets may be heartened by short term measures but China needs to convert to a consumer driven and much more decentralized economy which will take time.
Although major oil producers are willing to put a cap on production in order to raise prices the fact of the matter is that not all producers will join in and the oil glut and low oil stock prices are likely to continue.
The Europeans were late waking up to the need for stimulus measures instead of austerity in fighting the Great Recession. To the extent that the EU gets its economy going it is the one thing that in the shorter term may help the market. Nevertheless the question is still how far down is the stock market bottom before things start to improve.
The Bottom of the Market
Market Watch writes about signs that will market the bottom of the stock market.
For the average, long-term investor, the best advice during times of market turmoil is to remain calm and stick to a long-term investing plan. Calling a bottom-or a top-is a challenge even for professional investors. With that in mind, here’s a look at what analysts and traders are watching.
Genuine bear markets tend to last from 18 to 36 months. In other words, don’t look for a bottom soon as the major indexes have yet to retreat 20% from their highs, which is the widely accepted definition of a bear market. A fall below 1,704.66 would put the S&P 500 in bear territory, while the Dow Jones Industrial Average DJIA, +0.50% would need to fall through 14,649.91.
In short the market needs to fall substantially more before it hits bottom.
How Far Down is the Stock Market Bottom? PPT
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