Although no two bulls or bears are exactly alike, and sometimes their signals may be a bit obscure, eventually the indicators will pile up and a trend will become evident. As you analyze the stock market for signs of shifting trends, be cautious. Each market is different from its previous cousins, so not all the warning signs will be present each time. If you notice only one or two of the telltale clues, some fleeting business or economic event temporarily may be tilting the market. However, if you detect four, five, or more of these signs appearing all at once, you’ve probably discovered a major new market phase.
Before the bull begins to charge ahead, you will find six major signs that the bear has retreated into hibernation. Most of these signs apply to stocks, but often they readily relate to other investment markets as well.
One of the signs is that the market has undergone a mature decline. Naturally, if you want to determine whether a new market is on its way up, one of the first things you’ll do is determine what activity has come before. If the market has undergone a mature decline then a bull may not be far off.
Second, look for a market that is dull and boring. Historically, bear markets generally storm onto the market scene, but they depart extremely quiet. This kind of lackluster activity is one of the most common signs that a bear market is losing strength. Such sluggishness may go on for weeks or even months, but stock prices do not necessarily tumble along with trading volumes. When this scenario occurs, professional investors might say the market has been seized by a complacent attitude.
The next possible sign is when the market resists bad news. Generally, financial and even some sociopolitical news has a marked effect on the markets. When the markets refuse to budge, despite significant developments, you definitely should take notice.
Another sign is when the gloom is so deep that even the top-quality investments are sold. As a severe bear market grinds on for what seems like forever, stock investors, for example, often sell their blue-chip securities in one last brief selling period. These probably are the last stocks to go, as investors will have unloaded their lower-quality holdings at the start of the bear.
When the market has fallen to an uncomfortable degree, and investors believe hope for a quick recovery is gone, blue chips hit the market with a sudden decline. Not surprisingly, that tends to reinforce the bleak market mood, as investors begin to think that if even the best stocks are acting this way, then something really must be wrong with the market.
Next as a bear market begins to fade, stocks that once sold at price/earnings of, say, 18 to 20 times earnings often are selling at unusually low price/earnings ratios, perhaps less than half their former figures. When those stocks once regarded as must-have securities lose all their appeal, the change from the normal situation should cause investors to take notice. Those who have a chance to purchase bargain stocks before the next bull market should swing into gear.
Finally, high dividend yields offer a key signal. Like low price/earnings ratios, the often high-dividend yields to be found at the tail end of a bear market represent a market reversal in market psychology. Although yields in a bear market typically are higher than those for the same stock at the peak of a bull market, you can look for this phenomenon to alert you that a bear market has run its course.
What does it mean when you can identify several of these indicators? Obviously, the bear market has begun to fade and the bull market slowly is taking shape. More and more trading occurs daily, and the number of advances, the upward movements in the prices of the individual investments, outpace the declines. The volume of trading and the number of advances and declines indicates the market breadth.
To summarize, be aware of the following key signals that a bear market is approaching a bottom. First, market prices have been declining for more than 12 months. Second, the volume of trading declines and you start to observe a very boring market. Third, bad news makes no impression on the markets. Fourth, investors start unloading top-quality investments by heavily selling many of the blue chips. Fifth, investments that once were stars are now on the skids, selling at undervalued prices. With stocks, price/earnings ratios are unusually low. And finally sixth, stock dividend yields rise abruptly. The bottom line is if you observe most or all of these signs, the bear market is probably coming to an end and a new bull may not be far behind.
Happy Trading.
Jeff Neal
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
jeff@optionetics.com
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