The next talking head who claims how to call the market bottom… drink…
The next time that someone says that the stock market is oversold… drink.
The next time that someone says that a specific stock is looking cheap… drink.
The goal here is that you imbibe so much that you pass out. The goal is to wake up in the future, having avoided the temptation to call the market bottom in this selloff. I don’t want you to try buying stocks that “look cheap” in a sideway market where the fear has shot through the roof.
The S&P 500 fell under its 200-day moving average last Friday. While talking heads said that stocks were getting cheap, they ignored the patterns of the past. As you can see, the chart below offers insight into what happened with stocks once the S&P 500 fell under its 200-day moving average.
Those are some pretty ugly numbers. So – when is it smart to call the market bottom? And when will we know that it’s time to buy? Well, there are two signals. And only two that I’m watching.
The Fed Will Do… What?
Tomorrow, the Federal Reserve will offer an update on interest rates. Any rate hike tomorrow would lead to a dramatic shift in market psychology. Why? Because, according to CME FedWatch, the odds of a rate hike on Wednesday is about 5.5%. So, any hike would defy expectations.
The same source indicates that the probability of a rate hike in March is 93.4%. Following the absolute meltdown that we’ve seen in the market over the last few months, the market has been reacting to the expectation of rate hikes… in March.
The orange line below is the increased expectation of a rate hike in the market – the probability of a hike as being priced into the market. That dip you’re seeing at the end is a direct result of last week’s selloff.
Markets are holding out hope that the Fed will reverse course. My expectation – expect the Fed to hold the line on its actions.
The Federal Reserves Goals
Remember, the Fed has a dual mandate to bring the economy to full employment and manage inflation. The Fed has reached the first goal.
On the second goal, it spent a decade pumping cheap money into the economy. The combination of COVID, massive stimulus plans by Congress, and easy money (at zero interest rates) has created pretty strong inflation. So… they HAVE to raise rates. Otherwise, they’re going to push inflation out further – which would be devastating.
I’m ruling out a change in the Fed’s plans. Remember – the Fed only manages policy. They didn’t engage in the rampant speculation in the markets. Investors and traders did. It’s interesting to listen to people say that the Fed is going to create a market crash.
No one at the Fed held a gun to someone’s head and told them to buy a stock at 60 times revenue, while ignoring the actual value that exists in cheap banks or commodity producers. Greed and FOMO drove the market.
How to Call the Market Bottom
The first possible sign of a market bottom would be… if the Fed shifted course. I’m not expecting this to happen.
So, what’s the second signal? Well, if you look at that chart above you see some dramatic selloffs in 2010, 2011, 2015, 2016, 2018, and 2020.
What do we notice in the date from the chart above? Well, looking at the selloffs that we’ve seen in recent years, the insider buy/sell ratio is a great predictor of how to call the market bottom…
The steeper the selloff, the more we see the number of buyers to sellers at the corporate level increase in the month of the selloff. That’s it. I don’t think I can make it any simpler.
The corporate insiders – in the aggregate – will offer the best signal of when and if the market finds its bottom. No Jim Cramer. No market analyst. Not me. Not anyone who writes in this industry.
Just follow the signal from the insiders. It’s free on GuruFocus. If you don’t feel like tracking it down, I’ll be sure to let you know when it is time to buy the dip like the rest of the insiders.