Have Stocks Bottomed? These 2 Critical Indicators Reveal the Answer...

Most investors don’t just lose money when the market drops. They also lose their minds.

But you were prepared for the recent turndown…

You’ve carefully monitored the market since the first cracks appeared nearly six months ago. Most importantly, you’re calm and logical. You know markets go up and down. And you know what to do when the trend changes.

Sure, some of the ways we prepare for market downtrends may seem strange. But they’re data-driven – not emotionally driven. And they work.

Unless you’ve been on Neptune, you know the market’s dropping these days. The big question is this: has it bottomed out… or is the worst still to come? Today you’ll get the clues that could give us an answer…

At this point, you’ve already cashed in your big winners and ditched the flashy, popular stocks now taking a beating. As we’ve preached this year, you have to get rid of the “story stocks” like the FANGs or biotechs so many Main Street investors love when the markets get screwy. While these are fantastic stocks in roaring bull markets, they’ll bite you in the rump when the market turns sour.

It doesn’t sound fun to replace a Netflix(NASDAQ:NFLX) with a consumer staples snoozer like Campbell Soup (NYSE:CPB)— a safe stock we bought last month. But a simple portfolio move like that saves you a ton of grief (and coin) as the market tumbles down the stairs.

Changing of the Guard

Consumer staples are catching a bid while the consumer discretionary sector gets slammed. The economically sensitive cyclical stocks aren’t where you want to hide your acorns this winter. With all the gloomy news out there, cyclicals are slumping toward their August lows.

With defensive stocks winning the race, it’s clear that investors aren’t interested in taking any big risks. That’s not bullish at all…

But that’s not the only indicator telling us stocks probably have further to fall.

The market has yet to show us that big capitulation moment that usually marks a temporary (or even longer-term) bottom. We’ve seen plenty of selling so far this year. But we’ve yet to register any readings indicating widespread panic amongst investors.

And even though the CBOE Volatility Index (VIX) has been creeping higher to start the year, it hasn’t given us a capitulation spike. Look back to late August and you’ll see an angry VIX ripping higher as the market tumbled. Compared to those readings, the action so far this year looks downright ordinary.

Why does this matter?

Famed Technician John Murphy reminds us that every important stock market bottom since 2001has shown us a VIX reading above 40.

The following chart shows the VIX jetting above 40 in 2010, 2011, and this past August leading to market upturns, Murphy explains. Each of these VIX spike coincided with important rebounds in the S&P 500:

Spotting Bottoms

With implied volatility well below panic levels, you can see why we should expect more downside action in the near future. In order for the market to put in anything close to a short-term bottom, we need to see true panic. That means a big flush where folks are willing to sell at any price.

That’s the only way we’re going to see the beginnings of a real relief rally. As I told you last month, once the market beats the buy-the-dip mentality out of every man, woman, and algorithm, we’ll have a shot at higher prices. 

But until then, expect this market to continue to lurch lower. This is not the bottom…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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