Search’s go-to Charts to Determine Market Bottom

Long list of agenda for this article below

As promised in ”April 2020 updates”, I will be showing my stock purchases. More importantly, I will be sharing how I determine the bottom of the market or at least try to in section 3.

1. Updates to "April 2020 updates”

  • Has started buying shares?

2. April 2020 Outlook:

  • The Bad

  • The Good

3. How do I weigh the good and bad?

4. Verdict

1. Updates to "April 2020 updates”

Billionaire Bill Ackman recently made headlines for his hedge that surged to $2.6 billion [1]. It has been proven to be the right call to bet against the market amid COVID-19.

To protect investment portfolios, I made a similar call in my last article: “Stock Market & COVID-19” published 3 months ago (Jan 2020) and have massively sold stocks. Subsequently, Bloomberg also reported a 2,800% surge in demand for put contracts [2]. Another form of hedging.

Some of my transactions from 3 months ago where I have sold some of my favourite stocks prior to the crash.

After this massive crash, my overall portfolio is still in the positive. The best stock is still sitting on a 70% gain. This is after mass selling on Jan 2020.

** Word of advice: The last thing you want to do is to sell off your stocks at the rock bottom price due to emotions. Being able to keep emotions in check is fundamental to a good investor. An example I gave to a reader, Walt Disney’s stock price almost halved during the 2008 Global Financial Crisis but eventually went up 8 folds! Buying or selling of any shares should be done rationally for the right reasons. Will share more on what are the right reasons to sell stocks in future articles. As long as the stocks you are holding are rock solid companies, I am 100% sure that the share prices will recover. Nobody can predict the stock market. There were a few “crisis” that did not lead to a large sell-off (comparatively to a huge bear like sub-prime) such as the 2011 Black Monday or the 2015-2016 China stock market turbulence episode where the US market was somewhat insulated compared to other markets. Trying to time the market might have resulted in a net loss. One might have been better off buying from a value investor’s perspective when prices are attractive, i.e. undervalued. All these boils down to effective asset allocation as well.

Has started buying shares?

My first buy tranche 1-2 weeks ago:

Disclaimer: Please practice due diligence as nobody can know the future price movements. I am not expecting a quick rebound, only buying on cheap prices from an investor’s view (non-trader).

2. April 2020 Outlook: The Bad

Let’s take a look at historical VIX values. VIX is also known as the “Fear Index”. More of its definition can be found here [3].

From past case studies, the highest peak of volatility usually signifies the bottoming or the closing in on the bottom of the stock market, as highlighted in 2012 and 2008 respectively. The peak in VIX during Oct 2008 was not the bottom, it is the subsequent mini peak or possible major peak that points to the exact bottoming out in March 2009. This is echoed by billionaire trader Steven A. Cohen about the current market outlook amid COVID-19 where he mentions “After an earthquake there are tremors'” [4].

Insiders are usually a company’s own directors, etc. Hence, they are quite “zhun” (accurate) to buy when the company’s stock is undervalued.

In March, corporate insiders bought massively at the fastest rate since the 2008 Global Financial Crisis. However, now that stock prices are higher recently, there is a huge disinterest in buying stocks. Maybe, prices are not as attractive now.

Perhaps, one of the most ominous signs. The yield curve inversion that was much talked about last year has now steepened. An inversion followed by a steepening was almost always a warning sign for a US recession [7]. That has come true again.

We have just entered a recession and the stock market typically bottoms a few months before a recession ends. Hence, the market might not have bottomed.

Furthermore, the average crash caused by a recession is around 40%+ (excluding mini bears). The recent rout in March had only wipe out approximately 35% off S&P suggesting there may be more room to fall.

The Good

There are many other bad news constantly reported hinting of a larger crash ahead. Because of this, some of us might be fending off our purchases. However, there are encouraging signs too.

We’ve just witnessed a “death cross” signal (the same is used in technical analysis) in the New York nett new hospitalization numbers [9]. The “death cross” suggests a downward trend in future nett new hospitalization numbers. Similarly, this is observed in the number of ICU (Intensive Care Unit) admissions in New York. This should mean the US medical system will be better able to cope with COVID-19. When a medical system is overwhelmed, fatality rate would inevitably rise. This will likely not be seen here.

The numbers of new cases in US is also showing signs that the containment is effective. The peak seems to have passed. I did not base on mortality numbers but the new cases. Reason being that the numbers of new cases likely leads the mortality numbers.

China seems to be much ahead in the COVID-19 timeline as its response have apparently kept the coronavirus under wraps. In this economy, post-crisis, we observe there is consumption of non-essential services. Consumers were not “afraid” and did not keep their spending to just necessary items. reported transport bookings and hotel reservations increasing by more than 50% [11]. Hotel occupancy in China is recovering as well [12]. Levi’s has also reported sales improving by the week [13].

From an economic perspective, the world is doing whatever it takes on the fiscal or monetary side to battle the coronavirus [28]. The Federal Reserve even unveiled an unlimited quantitative easing policy to buy Treasuries and mortgage-backed securities [14].

3. How do I weigh the good and bad news?

In my humble opinion, we shouldn’t pay too much attention in confusing ourselves from all the news. An Engineer would label them as “noise.” We should focus on facts and conclude based on our independent thinking.

Some signs of bottoming out:

The chart below shows the number of times negative keywords mentioned in the press versus the stock market. The peak typically points to the bottom of the stock market.

For the past 3 weeks, US has reported unemployment of approximately 3.3m, 6.8m and 6.6m respectively. So, has the unemployment numbers peaked? Though not 100% accurate, history shows that the bottoming out of the stock market is when unemployment is at its peak.

In this market rout, the outflow from equities is 50% more pronounced compared to other outflows in 20 years. History shows that S&P usually rally after.

Interestingly, the record low of S&P500 Earnings Revisions Ratio seems to always point to the bottoming out of the market.

The current BofA Global Fund Manager Survey shows the expectation for global profits is near to its historical low. Again, based on history, the market rallies after.

All in all, my point is the best time to buy is when the general sentiment is the worst, when everyone feels the economy is falling through. It is not after everything looks good where every news is painting a nice picture. By then, market prices would have gone up and it is too late. Though this sounds intuitive, execution is much more complex. After all, the stock market is usually the leading indicator of the economy (not the other way round).

4. Verdict

Nobody can predict the stock market. What investors should focus on is to identify great companies at a discount and to buy on “value”.

“Only buy something that you’d be perfectly happy to hold

if the market shut down for 10 years.” – Warren Buffett

If we take a look at Warren Buffett’s favourite indicator “Market Cap to GDP” we see US standing at 122% (historical high: 151.3%) [20], i.e. still significantly overvalued. Currently, China stands at 34% (historical high: 662%) [21]. Based on the indicator, China is currently very much undervalued. HSI traded at around 0.92 times its book value on March 2020. This only happened 3 times in a total of 27 years [22]. The Global Equity Valuations further reinforces this point. The chart below shows that US stocks are considered expensive when compared to Emerging Markets and Developed Markets Excluding USA. This is especially so with the recent rebound of the S&P. However, do note that US’s current valuation is just slightly higher as compared to the 2002 crisis valuations.

What’s interesting is that Singapore’s market cap to GDP stands at 81.57% currently with historical low at 78.71% and high at 418%. Even though I have swapped majority of my Singapore stocks to Chinese equities in 2015, I am now into Singapore stocks as well.

This is a health crisis and not an economic crisis. Some could be waiting for the vaccine to be developed prior to entering the market. However, my guess is that the bottom will be way earlier. The bottoming should correlate more towards effective containment. If containment efforts are successful, the crisis is likely to have been abated.

I’m also guessing the bottom is near or has already passed. However, the recent “mini bull” has been too fast and furious. Coupled with the lack of interest from insider buying as mentioned previously, I am of the opinion that there might be some form of correction soon and won’t rush to buy stocks now since I have already executed my 1st buy tranche.

Also, I will not rush into buying COVID-19 hit stocks for instance, airlines etc. as we do not know how long the virus will last. Even with the numbers peaked, people will not travel as frequently as before. Our Prime Minister Mr Lee mentioned that COVID-19 could take years to run its course [24]. Likewise, Trump has mentioned that COVID-19 could last till July/August this year [25]. I would focus my buys on non-COVID-19 hit stocks which tanked together during this period. Subsequently, when opportunities arise, I will then swap some of these buys to COVID-19 hit stocks in the future. There is a chance that these COVID-19 hit stocks might recover before then and I would have missed the boat. That's ok because I want to put my money in stocks that I have more confidence in its recovery.

However, my views will change if there are unexpected events like: 1. Possible second wave of COVID-19 (there were 3 waves during the 1918 Spanish flu [26]) 2. Major companies filing for bankruptcies 3. Other events outside of COVID-19 4. Any other new events that only God knows

Disclaimer: Just sharing from experience as I have put my own money into the stock market over the period of 17 years. I am not a Chartered Financial Analyst (CFA) Charterholder and do not have any finance-related qualifications.


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