AGF Logo
  • Home
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Français
  • AGF.com
Skip to content
AGF logo
Insights and Market Perspectives
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Contributors
  • Français
  • Search
Search
Close
Looking for the Market Bottom

  • Investing and Market Views

For Print Only Logo
Insights and Market Perspectives

Looking for the Market Bottom

Author: John Christofilos

March 23, 2020

The COVID-19 market correction that has pushed most major stock indices deep into bear market territory in recent weeks is one of the most violent downturns in history. But the trend line has not been uniform: it has been punctuated by momentous selloffs and spikes up, however brief. As any investor who has been paying attention is painfully aware, market volatility is running high.

The big question is when the markets will hit bottom, as surely they will at some point. While much about the course of the coronavirus pandemic remains unknown, the past few days of trading activity conform to the familiar pattern of a classic bottoming process. If historical precedents – i.e. 9/11, the 2008-09 Financial Crisis, and others – can be relied upon at all, that process generally involves three stages.

The first stage is panic, which quite obviously is where markets are now. The second is relief, when investors start to feel more confident about the outlook. During this phase, markets generally jump to the upside, though perhaps not enough to regain all the losses incurred during the panic stage. That initial relief, however, usually proves to be short-lived, and it’s followed by the third and final stage of the bottoming process: demoralization. Markets retest previous lows, wiping out gains from the relief stage – that’s the bad part – and marking the end of the bottoming process – that’s the good part.

Obviously, we are still waiting for the relief stage to kick in and it’s important not to be fooled when it does. Instead, the third phase – demoralization – will be the true point of inflection, and the one during which it makes sense to assume a more aggressive stance and put more money to work in the markets.

So, when will this happen? In past selloffs, the bottoming process has lasted six to eight weeks, yet there is no way to know whether this time will be the same or different. Perhaps a more important question is not how long it will take markets to find the bottom, but how we will be able to tell when they do.

Clearly, the fundamentals of stock valuation are not going to be much help; amid the volatility of the past few weeks, familiar metrics such as price-to-earnings ratios have lost much of their utility when it comes to valuing individual stocks. However, we believe that technical indicators – trend lines, moving averages, and so on – are still meaningful, as they are based on broader market data.

There are a number of signals we monitor in our efforts to define a market bottom, but we think three in particular stand out as potentially reliable depth-finders. The first is the so-called fear gauge – the Chicago Board of Exchange Volatility Index, or VIX for short, which indicates 30-day volatility expectations based on the pricing of options in the S&P 500. It has been testing all-time highs during the recent panic stage, as could have been expected; durable moderation in the VIX, however, may suggest markets are approaching a bottom.

Second, market volume is vitally important. Any moves up or down on low volume can be unreliable signals, as they are often “head fakes” rather than the beginning of sustainable trends. Sustained heavy volumes on the upside or the downside are usually better indicators of longer-term movements.

The third important indicator is market breadth – the ratio of rising stocks to falling stocks. Obviously, given recent volatility, we are not seeing any consistency here, but a value of 1 or greater on a durable basis might give us some confidence that the markets have turned the corner.

In uncertain times, it’s understandable for markets to become a focus of fear and concern; it’s also understandable that some investors will start to look for opportunities to capitalize. But the first and most important lesson of smart trading is this: Don’t be a hero. Don’t think you’re bigger or more clever than the market. Amid volatility, patience truly is a virtue.  but it’s important not to overreact to market moves one way or the other, as you will likely have an opportunity tomorrow – or next week, or next month – to do better, without falling victim to declines as the market tests and re-tests the bottom.

Remember: the early bird might get the worm, but the second mouse gets the cheese.

John Christofilos, Senior Vice-President, Chief Trading Officer and Investment Management Operations Strategy, AGF Investments Inc. He is a regular contributor to AGF Perspectives.

The commentaries contained herein are provided as a general source of information based on information available as of March 18, 2020 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

AGF Investments is a group of wholly owned subsidiaries of AGF and includes AGF Investments Inc., AGF Investments America Inc., AGF Investments LLC, AGF Asset Management (Asia) Limited and AGF International Advisors Company Limited. The term AGF Investments m ay refer to one or more of the direct or indirect subsidiaries of AGF or to all of them jointly. This term is used for convenience and does not precisely describe any of the separate companies, each of which manages its own affairs.

™ The ‘AGF’ logo is a trademark of AGF Management Limited and used under licence.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2023 AGF Management Limited. All rights reserved.

Written by

John Christofilos

John Christofilos

Senior Vice-President, Chief Trading Officer and Investment Management, Operations Strategy

AGF Investments Inc.

More from John Christofilos

  • Investing and Market Views

Using Technical Analysis to Navigate Market Volatility

June 21, 2022

  • Investing and Market Views

Managing Heightened Market Volatility

April 19, 2022

  • Investing and Market Views

From Technicals to Sentiment: A Trader’s Approach to Market Analysis

August 10, 2020

  • Investing and Market Views

Drop and Give Myself Twenty (And Other Daily Habits of a WFH Trader)

April 16, 2020

Get perspectives straight to your inbox.

Subscribe now

More articles like this

Downshifting Equities to Neutral

  • Investing and Market Views

Downshifting Equities to Neutral

Kevin McCreadie | January 17, 2023

Kevin McCreadie, AGF’s CEO and Chief Investment Officer, discusses the AGF Asset Allocation Committee’s latest quarterly update and the “return to normal.”

Read More
An Alternative(s) Take on the New Year

  • Investing and Market Views

An Alternative(s) Take on the New Year

Ash Lawrence | January 13, 2023

The important role alternative investments can play in support of a 60/40 portfolio.

Read More
Yes, Markets Are Oversold. But Investors Still Need to Be Cautious

  • Investing and Market Views

Yes, Markets Are Oversold. But Investors Still Need to Be Cautious

Abhishek Ashok | November 24, 2022

Every month (or so), AGFiQ highlights the quantitative investment factors that are helping shape equity markets. Today’s focus is oversold conditions and the risk of weakening economic and earnings data.

Read More
AGF Logo
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
Follow AGF

AGF Web Site Pages © 2023 AGF Management Limited. All rights reserved.

  • Terms & Conditions
  • Privacy
  • AGF.com