How to Identify the Bottom of the Stock Market

(By Ken Little)

This is a magic date because stocks often post substantial gains coming out of a bear market and the biggest percentage increases happen early in the rebound.

The rebound usually doesn’t correspond with an upturn in the economy, but often precedes it. The market always looks forward so bad news today has already been factored into prices.

If you know when the market is hitting bottom, you can pick up some bargains before the upswing raises prices - the perfect “buy low” opportunity.

But what if you’re wrong?

Wrong Signals

The market is notorious for sending signals about false bottoms. If you jump at one of these false bottoms, you may soon see your value investment sinking further.

Even worse, the false bottom could be the first of many - each one a blip of hope before the market sinks further.

When the true rebound comes, it may be hard to identify.

It could be marked in the initial stages with bursts and retreats in prices.

So, how will you know the true rebound from the false start?

It’s actually fairly easy to spot - about three months after it happens.

Market Bottom

That’s when most observers will speak with confidence that the market bottomed and a true rebound began.

Of course, that information three months after the fact isn’t very useful, but it points up an important consideration.

Trying to time the bottom of the market is a guessing game a best - not a way to invest your money.

Your best strategy is to stay invested during downturns that way you can’t miss the bottom of the market and the subsequent gains on the upside.

It is difficult to watch the value of your portfolio drop in a down market, but study after study has shown that staying invested with a well-balanced portfolio is the best strategy.