Seeking guidance from charts is a fraught enterprise. In every blueprint that appears to contain insights, there’s either holes or one that contradicts it. Take the popular 50% retracement indicator, which states that once the S&P 500 recovers half its peak-to-trough decline -- a milestone it achieved Friday -- the index has almost always avoided making new lows.
That’s nice, except that a different gauge kept by Bank of America Corp., one that combines the S&P 500 price-earnings ratio with US consumer inflation, is adamant that stocks have yet to bottom. Every market trough since the 1950s saw the measure fall below 20. During the selloff this year, it only got as low as 27. The model has “a perfect track record,” BofA says.
With the Nasdaq Composite extending its rally from the June nadir past 20% and the S&P 500 fast approaching that threshold, one that loosely denotes a bull market, an argument is sometimes proffered that momentum alone is a case for getting back in. But Michael Burry, an investor who is best known for betting against the housing market ahead of the 2008 crash, noted last week in a tweet that during the bursting of the internet bubble, the Nasdaq jumped 20% at seven different times as it fell 78% to a 2002 low.
The same also rang true in 2008, when the S&P 500’s drawdown was interrupted by two separate bounces of 20%.
Nasdaq jumped more than 20% in seven different times during the dot-com crash
The randomness of it all isn’t lost on Ed Yardeni, president of his namesake research firm who nailed the market bottom in 1982 and 2009. Back in June, investor pessimism by some measure reached levels not seen since early 2009, a contrarian indicator that he said set the stage for a recovery.
One quirky fact that helped build his case: the S&P 500’s close to 3,666.77 at June’s trough is exactly 3,000 points above the intraday low of 666.79 that marked the onset of the 2009 bull market.
Dubbed his “666 indicator,” the market veteran has found this number sometimes showing up in his life in the midst of market turmoil, as if, he said, to give him a hint to stick to his long-held bullish stance. It happened in January 2016, when he checked in to a Zurich Hotel and was assigned room 666. The following month, the S&P 500 stemmed a 13% drop.
“It’s important to have a little bit of a sense of humor in this business, and I thought it was kind of fun,” Yardeni said. “You have to take a fairly diversified approach to try to forecast the stock market. Doing it just with one kind of discipline isn’t enough.”
This article was provided by Bloomberg News.