4 signs of a stock market bottom

It was another crazy run for stocks during Xmas week, but at least it resulted in the major averages rising.

The S&P 500 Index finished the week almost 3% higher, closing at 2,485 on December 28.

The latest earnings revisions from the Dow Jones S&P Indices for 2019 showed that earnings estimates fell again, this time down to $172.10 per share from $172.76 the week before.


Valuation Dynamic

That means that since their peak in August earnings estimates have now fallen 2.8%, while the S&P 500 has dropped 15% from its highs.

It leaves the index trading at 14.4 times 2019 earnings estimates, according to my analysis.

I went back and recalculated the S&P 500 price-to-earnings (PE) ratio going back to the year 1988 based on forward, 12-month earnings.  

There are some minor difference when considering the PE ratio using future earnings versus using current earnings.  

In either case, in my view, both show the current valuations are approaching their historical lows at below 15.


Earnings Multiples

Could those earnings multiples contract further?  Perhaps. History shows they have reached levels as low as 11.
I think it is fair to say that historically valuations for the S&P 500 have been somewhere between 15 and 20.  

Believe it or not, at 17.5 times 2019 earnings estimates the S&P 500 would be over 3,000. That is, of course, assuming those estimates do not fall further.


If there’s some good news in the market, it may be that VIX index, which measures volatility, hit its highest level since early 2018, rising to around 36.

In my opinion, the VIX needs to get back below 26 to see this stock market recover further.


Key Ratios

The Put-to-Call Ratio, a key reading of investor sentiment,  reached some lofty levels over the past two weeks.

In my opinion, that would suggest that fear levels are high.


The Relative Strength Index (RSI), a momentum indicator, of the S&P 500 has hit its lowest levels in many years.

Previously, that happened in August 2015 and August 2011.


Hitting Bottom?

In my analysis, the market may be approaching a bottom from recent declines, but then again there have been some false dawns in the past.

Looking ahead, investors on Jan. 4 will be able to assess the employment reports for December.

In my view, it isn’t clear anymore how a strong employment report will be greeted by the market.

While it would signal a strong economy, it may also suggest future rate hikes from the US Federal Reserve.

Photo Credit: Christophe Pelletier  via Flickr Creative Commons

Disclosure: Certain of the information contained in this article is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The author believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.