While timing the stock market's bottom is impossible, historical trend data show the Dow could reach its floor sooner than you think.
The past month has been a frightening one for investors around the globe. After weeks of losses, investors are becoming increasingly nervous about whether the Dow will find a bottom anytime soon.
There’s no way to time the bottom accurately but history dictates that at some point, it will come. Signs show, the stock market turnaround could be closer than we think.
It’s impossible to say exactly how low the stock market will go, but some evidence suggests we’re getting close to the floor.
Despite the fear and anxiety causing the selloff, Google Trends shows that people are searching for “stocks to buy” more than ever before. While that doesn’t necessarily mean investors will rush into equities tomorrow, it suggests they’re making buy lists and preparing to buy the dip.
In other words, a lot of people are bullish about the future of the market.
Google search terms are far from being a reliable market indicator, but other notable spikes in the search term “stocks to buy” came before significant recoveries.
In the beginning of November 2016, the Dow was down to 17,888. The following week Google saw searches for “stocks to buy” surge and the Dow index went on to gain 5,561 points over the next year.
The number of people searching for that phrase was also elevated between January and February of 2018 when the Dow suffered a 10% loss. The index went on to continue its decline in March 2018, but investors who bought soon after searching would have seen gains between 8% and 12% over the next year.
There are other factors that suggest the market will bottom out soon. Jeff DeGraff of Renaissance Macro Research pointed to investor sentiment data as reason to believe a turnaround is on the horizon.
Survey data show that investor sentiment has fallen into the bottom 10th percentile, something that historically precedes a market rally.
DeGraff says that the stock market could recover before coronavirus cases peak, saying that investors are more interested in whether the government will be able to stem economic losses and keep the ballooning corporate debt bubble from popping.
If that’s the case, whether or not coronavirus continues to ravage across the U.S. and Europe through the summer doesn’t matter from an investment standpoint. Instead, the timing and size of the federal government’s stimulus package will be an important turning point.
Reading that there’s a “death cross” showing up in the Dow’s chart might sound terrifying, but it’s not as bad as it sounds.
The so-called death cross is when the Dow’s 50-day moving average slips below the 200-day moving average. When the two invert, it’s widely considered that a long-term bear market is on the horizon.
The last time this cross turned up was December 19, 2018 – three days before the market hit rock-bottom. Another cross in January 2016 came four weeks before the Dow’s floor and in 2015 the death cross showed up two weeks before the market finally bottomed.
Notably when the cross showed up in 2015, the Dow declined 10% in those two weeks.
In 2018 and 2016 the Dow lost 6.6% and 3% respectively.
In 2015, the 200-day moving average was still rising when the death cross appeared, while in both 2018 and 2016, the 200-day moving average was falling.
When the cross happened this year, the 200-day moving average was on its way down.
All this doesn’t mean its time to pile into the market, but it does provide some perspective that a bottom is coming and that investors should be ready.
The market is in a tailspin, and could be for the next few weeks— but it will hit a floor eventually and when it does it will mark a huge opportunity.
Google data show investors are gearing up to buy, and history tells us that these trying times shall pass.
Last modified: September 23, 2020 1:40 PM