Last week saw the best single-week market performance since 1939. As stocks rallied again on Monday, have we hit bottom yet? Is it time to buy the dip?
After the longest bull market in history finally came to an end in mid-February, people were bracing themselves for an aggressive and long-lived downturn. However, as the bull market lasted 11 years, the bear market proved to be the shortest of its kind at just 11 days, with the Dow (INDEXDJX: .DJI) now up 20% from its coronavirus sell-off low reached on Monday, 23 March while the S&P 500 (NYSEARCA: VOO) has risen more than 17% from those levels. The Nasdaq (INDEXNASDAQ: .IXIC) has also bounced more than 13%.
Does this mean that the market has bottomed out already and we missed a unique buying opportunity? I wouldn’t bet on it…
What is the stock market bottom?
As the market falls into correction (10% drop) or bear (20% drop) territory, analysts from every walk of life will be searching for the answer to when it will hit its lowest point or bottom. This simply means the point at which the market has fallen furthest, and has nowhere to go but up.
Investors will be looking at this as a way of getting some of the most coveted stocks out there at the cheapest possible price. After all, why buy Apple (NASDAQ: AAPL) or Amazon (NASDAQ: AMZN) at their best when you can get them much cheaper?
There is only one problem with this: unless you are a seer or soothsayer, there is absolutely no way of knowing when the market is going to bottom out.
(If you happen to be a fortune-teller of some sort, could you please tell me when live sports will return? I’m tired of watching snails race in my garden.)
Yes but, have we hit bottom?
The simple answer is: ‘I don’t know. Nobody does.’ The less-simple answer is: ‘probably not, so brace yourself’. Sure we’ve had four good days in the last six on the market, but the damn thing is so fragile right now that the optimism or pessimism of a Reed Hastings sneeze is enough to send Netflix (NASDAQ: NFLX) stock soaring or plummeting.
Just as it made no sense before the downturn when the likes of Virgin Galactic (NYSE: SPCE) and Tesla (NASDAQ: TSLA) would jump on earnings misses, now stocks fall despite hitting expectations. Nike (NYSE: NKE) reported wonderful online-sales numbers at its recent earnings call that more than offset its coronavirus losses, but still fell. Just yesterday, Lululemon (NASDAQ: LULU) reported better than expected earnings and revenue but is still down 2% in pre-market trading because they did not wish to issue guidance at such an uncertain time.
There is no rhyme or reason to the market’s mood right now, and attempting to pinpoint a bottom amidst this madness is folly, to say the least, but there are signals to look out for.
Watch for the signs… But prepare otherwise
The coronavirus is directly influencing the market’s performance right now, like a puppet master pulling all the strings, and unfortunately, there is no sign of this virus slowing down. President Trump has recently extended the social-distancing period to April 30, while some countries around the world estimate a further six months of lockdowns. That means the market could remain volatile for another six months at least.
With that in mind, according to Goldman Sachs (NYSE: GS), there are three criteria which they believe must be met before a bottom is hit:
- The COVID-19 spread must show a consistent decline.
- Federal intervention plans (such as the $2 trillion stimuli) must show evidence that they are sufficient in helping the economy.
- Investor sentiment and positioning must bottom out.
However, in order to truly avoid calamity at times like this as an investor, there are a couple of successful methods. One is ‘dollar cost averaging’, which you can read all about here:
Another method is to simply diversify your portfolio with a long-term investment strategy in mind. Always remember MyWallSt’s six golden rules:
1. Get started: No matter how big or small the investment.
2. Think long-term: The buy and hold philosophy will outperform the market in the long-term.
3. Never borrow to buy: Save first, then invest.
4. Diversify: Accumulate a minimum of 12 stocks across 6 different sectors.
5. Buy what you believe: Own part of a business you love.
6. Invest What You Can, When You Can: Get your saving habits right.
If you use either of these methods or a combination of both, you won’t need to worry about finding the bottom.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.