Looking for the Bottom with the S&P 500 Bullish Percent Index
Written by S. Wade Hansen Stocks Portfolio Management
Investing during a bear market can be a lot like taking a road trip with young children. Just as the children seem to continually yell "Are we there yet?" from the back seat during a road trip, investors seem to continually ask "Have we reached the bottom yet?" during a bear market.
Trying to identify the bottom of a market downturn seems to be a favorite activity among investors and analysts---especially in this day and age when we have 24-hour news channels constantly telling us how bad things are. Unfortunately, the truth is there is no sure-fire way to guarantee an accurate prediction of when the bottom is going to arrive until after it has arrived.
However, there are a few tools you can use to help you put the odds in your favor in your analysis. The S&P 500 Bullish Percent Index is one of those tools.
The S&P 500 Bullish Percent Index is a point-and-figure chart that derives its value from the point-and-figure charts of the 500 stocks that comprise the S&P 500. Here's how it works:
- If an increasing number of those 500 stocks are showing buy signals on their point-and-figure charts, the S&P 500 Bullish Percent Index will be moving higher.
- If an increasing number of those 500 stocks are showing sell signals on their point-and-figure charts, the S&P 500 Bullish Percent Index will be moving lower.
S&P 500 Bullish Percent Index
Now, you don't need to understand exactly what a point-and-figure chart is or how it works to understand how to use the S&P 500 Bullish Percent Index. So if you aren't familiar with point-and-figure charts right now, don't worry about it.
Here's what you look for on the S&P 500 Bullish Percent Index chart:
- If the farthest column to the right is a column of Xs and is moving higher, the stock market should be moving higher.
- If the farthest column to the right is a column of Os and is moving lower, the stock market should be moving lower.
- If the farthest column to the right is a column of Xs and is moving above 70, the stock market is approaching a level where it could be considered overextended, and it may turn around and start moving lower in the near future.
- If the farthest column to the right is a column of Os and is moving below 30, the stock market is approaching a level where it could be considered overextended, and it may turn around and start moving higher in the near future.
This last condition is the one we are most interested in now. As you can see in the chart above, the most recent column of Os has dropped down below 30. This means the market is getting to a point where it may be overextended to the downside, and it has a chance of finding a bottom and turning around.
Of course, this is not guarantee, and it may take a while for the bottom to actually form and the turnaround to actually happen, but we at least have some advanced warning of what may lie ahead.
Wait until you see a column of Xs form to the right of this column of Os. Once it does, it's probably time to start getting back into some more stocks.
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