Stock Market Bottom in Sight After Classical Seasonal Adjustment
The S&P 500 Index has given back all of its gains for the year. While it has fallen almost -11% from its highs, we've seen many S&P 500 stocks fall -20% or more.
Corrections are painful and corrections in the 10%+ category are particularly painful. The persistence and size of the current stock market decline has turned investor sentiment quite bearish. We’ve talked about sentiment indicators several times over the years. In our last update, we mentioned the NYSE High Low Index indicator that we monitor, and how that now resides in very rare, bullish (buy) territory. Another important market indicator we follow is the Daily Sentiment Index (DSI). It’s a contrary indicator. The DSI provides an “emotional” measurement of market behavior. It is particularly useful in identifying turning points in the stock market and even specific stock market sectors, including commodities like gold and silver.
On October 25th, the DSI for the S&P 500 Index broke through the critical 90% level, which is most often associated with a coming trend reversal. The current decline from the September 21st high is now registering a DSI reading of only 8% bulls, 92% bears. This is a bearish extreme. The all-time record DSI low was just 2% bulls, 98% bears on March 2, 2009. The stock market bottomed one week later, on March 9, 2009 marking the end of the great bear market.
So, while stocks may go lower from here, likely in a final capitulation (panic move), sentiment readings indicate that we may be very close to a stock market bottom. This is why we continue to systematically put capital to work during the big, triple digit down days in the market.
This has been one of the weakest October periods in the last decade. Many of the indicators we follow have fallen into the “green zone”. Historically, we have seen attractive buying opportunities come from these deeply oversold levels. Remember, October is the best time to buy stocks and mid-to-late October is the best time to buy depressed stocks, especially techs and small caps.
So, we recommend putting capital to work – while everything is on sale.
Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group, and/or its clients may hold positions in the ETFs, mutual funds and/or any investment asset mentioned above. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.