Signs of a bottom?

[Bhoddhisatva]

Imagine you have a good pile of cash and want to invest it.

You’ve been sitting on your hands for a few months feeling markets were over-valued and not wanting to commit most of it to stocks.

Now the markets have dropped substantially I’d welcome suggestions on what are good signs or indicators for being at or near the bottom ... of UK or global stocks.

I know conventional Foolish logic is not to try and time the markets but ... if one is lucky enough to have cash at hand it is a really tricky time deciding when to commit.

I could imagine trading volumes might drop as people stop buying or selling shares being fearful of the market. Or fundamental valuations reach daft levels ... but what level?

Really would welcome any practical suggestions.

[onthemove]

Imagine you have a good pile of cash and want to invest it.

You’ve been sitting on your hands for a few months feeling markets were over-valued and not wanting to commit most of it to stocks.

Now the markets have dropped substantially I’d welcome suggestions on what are good signs or indicators for being at or near the bottom ... of UK or global stocks.

I know conventional Foolish logic is not to try and time the markets but ... if one is lucky enough to have cash at hand it is a really tricky time deciding when to commit.

I could imagine trading volumes might drop as people stop buying or selling shares being fearful of the market. Or fundamental valuations reach daft levels ... but what level?

Really would welcome any practical suggestions.

If you want to make an intelligent evaluation, the first thing you need to start from is some kind of rational analysis of what you think a fair value is.

Once you have that in mind, you can then start to make judgement calls.

Remember markets are driven by humans and human psychology, so they can easily overshoot in all directions.

This is where a calm rational evaluation of what a fair value is comes in.

If the market is below what you perceive a reasonable fair value, then you are into timing market psychology - how far / how long do you think before the market starts to revert to rational levels.

On the other hand, if the market is still above what you consider fair value, then you can safely conclude we're not at the bottom, and definitely you should wait (unless you want to day trade the intervening market psychology on the way down).

Obviously, the key thing here is establishing that calm, rational fair value.

And that's the trillion dollar question - it depends upon so much.

Me personally, I've spent my last floating cash buying FTSE100 ETFs this past week. Personally I think in the medium to long term value is somewhere at or above where the markets are now.

My (cold hearted) reasoning is thus...

The virus seems to be mild for most people. If you're under 50 it seems like it'll not be much worse than a common cold. In fact there are people much older than that who are coming through it with no major problems.

In other words, the short terms effects are really now down to collective group choice. The decision to close countries, close shops, prohibit gatherings, is just a choice to try to stamp out the disease to protect the (elderly / at risk) 1% who would succumb.

And this is all without making any presumption of a vaccine being developed, or other treatments being found which could mitigate that 1% death rate.

So my view... yes it's serious, and yes if we have a chance to stamp the disease out, then yes, let's all club together and spend a couple of months keeping physically apart from others as much as we can, and let's see if collectively we can win!

But if after 3 or 4 months it becomes apparent that we aren't winning, and that the virus is here to stay, then meh... shrugs shoulders... not great for the elderly or infirm, but I think by that point public opinion would then become accepting that we'll just have to consider it as another type of flu in circulation ... just another hasard ...

At that point, for the most part, the world will spring back into life. Supply chains will be running back to capacity (if they aren't already).

(I know it's cold hearted to say it, but ...) ... those unfortunate enough to succumb are largely not going to be of working age. They are not going to be the productive ones. So the impact to production capability is likely to be minimal once we're through ... whether that's having got it under control, or whether that's coming to terms and accepting it's circulation... either way, I don't see that it will dent long term production.

Sure, there'll be a big short term hit for the 3 or 4 (or 5 or 6) months while we see what we can do. Everyone suddenly staying at home for several months will certainly have a short term impact.

But - famous last words !! - I just don't see that in 12 to 18 months time, that one way or another, things aren't going to get back to very close to where they were before in economic terms.

In fact, I dare say that this event might even be a kick up the butt, that ushers in further significant investment into vaccine research, medical testing, etc, including computational analysis, artificial intelligence , etc, to more rapidly develop treatments, tests, analyses, vaccines and so in in future.

In other words (and I very well might come to regret saying this!), but I very much feel (and it's nothing more than feel) that we are now substantially below fair rational medium to long term valuation, and that now markets are being driven by greed and greed.

I don't like it when people say "fear and greed" because the assumption that I've always had is that the 'fear' element was always referring to the drops... but that's nonsense.. the drops are just as much greed as the rest of it! Prices are falling, because people are being greedy, not knowing where the bottom is, they are holding out thinking they are going to get even more for less tomorrow.

I believe now that the drops are being driven by greed. There's no saying how far down they could go. And there's no saying how long low level might persist - I suspect until either virus cases start dropping globally - or global acceptance of it circulating is reached - until then I don't expect any strong movements substantially back up (other than large day to day swings).

But eventually, in 6 to 12 to 18 months, I think fair value will be somewhere above current values.

So yes there may be lower bottoms... or equally there might not ... but which is the lowest, we won't know without the benefit of hindsight when it will be too late.

[staffordian]

If I were in that position I would be buying in chunks over a period of time starting now, rather than committing all my funds in one go.

I'd make no attempt to guess the bottom as it would purely be guesswork

[AsleepInYorkshire]

Imagine you have a good pile of cash and want to invest it.

You’ve been sitting on your hands for a few months feeling markets were over-valued and not wanting to commit most of it to stocks.

Now the markets have dropped substantially I’d welcome suggestions on what are good signs or indicators for being at or near the bottom ... of UK or global stocks.

I know conventional Foolish logic is not to try and time the markets but ... if one is lucky enough to have cash at hand it is a really tricky time deciding when to commit.

I could imagine trading volumes might drop as people stop buying or selling shares being fearful of the market. Or fundamental valuations reach daft levels ... but what level?

Really would welcome any practical suggestions.

Are you trying to buy at the bottom? Or are you worried that when you buy the stock will fall further?

I don't think you or anyone can successfully time the bottom. But you can have values [already] available of some of the companies you've been looking at recently with a view to buying at the value you have put on them. I'm not a true value investor by any stretch but I do like the PYAD principles. In particular I avoid debt or accept it if it looks manageable.

Some of the airlines may look vulnerable now - but if they have sufficient cash to survive the next 12 months they may come out the other side with significant gains on where they are now. If, like Thomas Cook, the bulk of their fleet is purchased through debt then they could find survival difficult.

House builders may see sales fall off for a period. But I'd see that more of a delay in purchase rather than a cancellation and there will, I suspect, be a demand surge after events have died down.

Each business sector will be affected in differing ways and some companies within each sector may well find the aren't prepared for this situation and find it difficult to progress without taking actions which will reflect the current share price.

AiYn'U

AiYn'U

[johnhemming]

The economic impact is different on different stocks. CCL have shut down for a couple of months and when they start up again their sales will probably not be as much. IAG will suffer a serious problem, but to be fair air flight is likely to pick up more than cruising although they may move the cruise routes to warmer areas to cut down infection.

I am long in some banks. I would expect some impact on banking, but they were already quite low.

I would expect oil to come back later this year although I think mining will take longer. I am expecting iron ore to see reductions in value relatively soon. I am surprised at how much it has held up.

Hence the markets will follow the direction of the economy when people have a better idea of what it is.

[odysseus2000]

I have no idea if the markets have bottomed, all I know is that on Trump's address US markets recovered in a simultaneous up move across all the S&P sectors mostly taking out Thursday highs. If we get follow through next week we likely have at least a short term bottom & vice versa.

For now it doesn't feel like a bottom, too many folk seeing it as a buying opportunity, not yet have we the universal hate that is a classic bottom sign.

The success over the last few weeks have been the shorts. One trader was telling me he was in 7 figures via puts, another showed me his account on Thursday, up over $100 k without options in the previous 4 days. If the market slide resumes I expect more short selling bans & potentially market closures.

The argument that stocks are now cheap relative to future earnings makes no sense to me as I have no clue what future earnings will be. We are now leaving the seasonal weak period of the year, the time when there are no poll tax payments & entering a better time for business. If these better times don't come I expect lots of bankruptcies: airlines, hotels, guest houses, pubs, restaurants... anything that brings folk together. Bankruptcies hurt banks & hurt the exchequer who has to pay out lots more benefits. If Schools are closed all the support staff get no money, teacher likely get small retainers, fuel sales fall, car sales fall... all manner of hits to the economy & that makes me suspicious of future earnings estimates.

Also the argument that it is a few old folk who will go seems to forget that the Lords is full of such folk, quite a few in the commons & the majority of the senior Royals. I find it hard to believe we will throw such folk out of the lifeboat.

Meanwhile as noted in another thread the £ has been hammered against all major currencies: $,€, Yen. Gold was creamed on Friday with Trump's announcement, oil rallied abit, but for how long. Normally weak £ means loads of tourists, but not now & everything we import goes up.

There are also some wild comments going about. One being that we can't make masks fast enough. I expect as politicians waive money in front of mask makers, production will rocket. Another that a vaccination will be soon ready. Yes, but unless we abandon testing it will take months to be vouched safe & given to folk. Sure some might be happy guinea pig testers, but most will be wary.

Personally I have liquidated most positions. If I have missed a bottom I don't care, I am still well up for the year. For now I can't see very far ahead & would prefer to miss a big move up than catch a big move down.

Good luck!

[odysseus2000]

Jonathon Pie view of the crisis, very strong language throughout, but his points on how 14 days of isolation could be trouble for many might be not too far off:

https://youtu.be/aox7CeOdmOY

Regards,

[odysseus2000]

Buffett on bad times in the market, short video, & how this week's are not as scary as previous troubles:

https://youtu.be/b8fSPr2gcKQ

Regards,

[odysseus2000]

If we can get more videos like the first part of this cnc 6+ minute video we have more chance of a bottom, but then you get the rest of the video saying how this is the worst its ever been, buying opportunity etc which undermine some the fear of the first part:

https://youtu.be/siaVsbLLrpg

Regards,

[odysseus2000]

Fed ćuts rates & launches huge intervention, coordinated with other central banks:

https://www.theguardian.com/business/20 ... oronavirus

Not sure if this helps or spooks markets.

Regards,

[Spet0789]

Fed ćuts rates & launches huge intervention, coordinated with other central banks:

https://www.theguardian.com/business/20 ... oronavirus

Not sure if this helps or spooks markets.

Regards,

SP500 futures down 5% as I write so looks like the latter. Personally I am not surprised by this. Huge Fed cuts at the weekend usually frighten the horses.

[FoolishFilFive]

By summer 2021, a vaccine will be in wide circulation.

Before then, the world economy will take a tremendous wallop as people significantly slow their spending on restaurants, nightclubs, football, planes, holidays, conferences etc. A recession therefore results - lots of smaller companies go bust. Daily drip feed of bad news - this many dead, this activity banned, this company laying people off.

Seems to me that drip feeding in cash - maybe six percent of your spare cash a month from April - is likely to look sensible when you look back on this time from 2025.

[redsturgeon]

By summer 2021, a vaccine will be in wide circulation.

Before then, the world economy will take a tremendous wallop as people significantly slow their spending on restaurants, nightclubs, football, planes, holidays, conferences etc. A recession therefore results - lots of smaller companies go bust. Daily drip feed of bad news - this many dead, this activity banned, this company laying people off.

Seems to me that drip feeding in cash - maybe six percent of your spare cash a month from April - is likely to look sensible when you look back on this time from 2025.

I would agree...potentially April 2021might be a better start date though!

John

[odysseus2000]

Hard falls for UK stock, especially those likely to be hurt by the virus war: Easyjet down over 20%, First Group down over 40%,...

Terrible news for shareholders and employees who have committed their lives to their business and seeing it broken.

I wonder if these business can survive. If they are lost they would create serious holes in the abilities of many other business and restrict travel opportunities.

Whether they are considered important enough to save as were the banks in 2008 is a political question with consequences of potential contagion in terms of how many other business should also be saved.

If these or other business are nationalised shareholders could get nothing and this makes me very wary of folk advocating bottom fishing here, but at some point many business will become buys. Currently I have no idea when.

Regards,

[Bhoddhisatva]

Thanks for the thoughts above all of you!

* To the question "do I want to buy at the bottom?" the honest answer is "hell yes!" BUT I know it's not likely and impossible to predict accurately, if at all.

I could drip feed in, as suggested of course, but I was hoping to establish some good indicators that might say "most of fall done now" or "sentiment turning neutral or positive across the markets. But this is - as one of you said - trying to judge the psychology and emotions of individuals AND collectively of the crowd (or should I say "herd" as that seems to be an in-word).

* Given I am fervently anti so called "technical analysis" as I believe it's reading tea leaves and charts are not predictive, I steer away from that kind of approach and trying to judge people's/crowd/market sentiment seems to me to be close to TA territory.

* Vaccines may be earlier than summer 2021 according to reports of accelerated in-man testing starting with some candidates already, anti-virals also seem to have saved some in Japan who were otherwise dying, hotter weather may also reduce cases and transmissions ... so given the market looks ahead for the oft-quoted 18 months, I could imagine sentiment changing earlier than summer 2021 by when there is a high chance of a vaccine being released.

Seems to me there are (at least) two ways of looking at this:

a) Look for signs of capitulation in the market - trading volumes, signs of fear, company collapses etc. and see if these slow down, stop or reverse - might one or or more of these indicate a change in direction overall?

b) Establish "good value" fundamental criteria (as one of you suggested) and buy when this is matched or bettered ... problem with this is that the virus and oil price double-whammy has changed revenues NOW and so one is assuming some kind of return to business as normal over next 6, 12, 24 or more months and then todays or tomorrows price would look cheap later.

One way might be Benjamin Graham's approach to "value" which was looking for companies trading AT OR BELOW "book value" - i.e., where total share market cap is equal to or less than total assets minus debt.

For sure I am going to avoid companies with high debt that need servicing - as Warren Buffet said, "when the tide goes out you see who has been swimming naked".

The current slow down and disruptions are going to slaughter airline and cruise revenues (why did I buy some CCL ten days ago!?) and some may not weather the storm.

I think I will dip my toe in this week ... top of my list for study are oilies (RDSB went below 1000p briefly this morning!), telecoms (why would they go out of favour!?), fast moving consumer goods (Diageo, Unilever, L'Oreal, P and G), FTSE 100 or 250 iShares/ETF ... possibly some foreign or world index ETFs.

Thanks for all and any comments/thoughts.

[tug7]

I have money to invest so I would be delighted if I knew when we hit the bottom - but I won't.

The way that I am looking at this is that in a developing situation the market cannot fully know where it is going. I am looking for rather more stability less volatility - than we presently have before I leap.

The one thing that is certain is that I would get a lot more shares for my money today than I would have only a month ago.

[Wuffle]

Ody wrote;

'Whether they are considered important enough to save' w.r.t. commercial enterprises.

When the question starts to be asked in the wider context - and the politics starts to get really tricky - that looks like the time to buy to me.
The pendulum is right the other way at the moment but it isn't a very forgiving world.

W.

[odysseus2000]

Defensives are still being sold: BT, Tesco, Morrisons all down circa 3% and SSE down nearly 7%.

Once NY opens at 1:30 pm (they are already on summer time) we might get some steer on the short term.

Regards,

[Howard]

I haven't a clue when the bottom of the market will be. However, having weathered several market calamities over 30+ years of investing and looking at the reasons for the drop, it would seem sensible to consider waiting two or three years or more for the markets to recover.

If this suggestion is wrong, you will see the markets start to rise convincingly at some stage. That might be the time to start investing as momentum will be on your side. Yes, you will have missed the bottom but investing now might give you an idea of how much further markets could fall!

Having written the above, it might be interesting to pick a few companies or funds you think might do well in the short term and invest 5% of your cash in them. To be honest that is what I did last week and they've all dropped !

regards

Howard

[1nvest]

A couple of methods. Wont have you perfectly time the bottom, but may have you averaged in at a reasonable average price :

1.

Deploys all of cash into stock

Decide how long the risk/down might last. With Corona for instance we're just starting the beginning where contagion runs riot. In a few months most will already have endured it, most will have recovered (peaked), so a lump sum divided by 5 and deploying 20% now, 20% in a month, another 20% after 2 months ...etc. may have you cost averaged in overall at a reasonable average value.

Or

2.

Might not deploy all of cash into stock

Use a relative valuation measure. The FT250 index is a reasonable UK choice. The mental approach I use as a guide is that firms broadly typically borrow (Corporate bonds) around 50% of their book value, so are a form of 1.5x leveraged holding. 67/33 stock/bond is like 1x non leveraged. Leveraging just increases volatility, yields similar overall rewards as non leveraged, so if 100% stock value drops to 67/33 stock/bond value levels then prices are fair. If 100% stock drops to 50/50 stock/bonds then its moderately cheap. If it falls to a conservative 33/67 then its cheap. If its falls to be comparable to bonds then its very cheap. Regression that and 1986 was a reasonable base date to work from (100% stock compared to 67/33), roll that forward and my napkin figures suggest

FT250 2019 end of year 21883
Recent 13616

11% below non-leveraged (67/33 FT250 15132)
-12.4% decline required to hit fair (50/50 FT250 11928)
-33% decline required to hit low (33/67 FT250 9084)
-65% decline required to hit deep low (compare to just bonds FT250 4751)

and invest a quarter of the available cash reserves at each of those. But where quite likely not all of cash will be deployed.

Those figures are all relative to year start values, how far up 100% stock was relative to the others. Just a very basic measure/guide, but better than nowt.

.. Or ..

Use a combination of both