Wall Street professionals don’t just look at the major indexes to see if the market has hit a bottom. They look at other indicators too.
Has the stock market hit bottom? Have stocks found support? When will prices stop falling?
Stock traders ask these questions every day, but they keep looking in the wrong place to find the answers. Investors seem to be transfixed on the value of the Dow Jones Industrial Average (DJIA), but the value of the Dow isn’t going to tell you when the stock market has found a bottom—at least not until well after the fact, that is. You need to look at other indicators to determine when the stock market is going to find a bottom and start moving higher if you don’t want to miss the initial surge. In this article, I’ll cover five such indicators.
I referred to these indicators as “secret” indicators in the title, but I don’t mean secret as in a “wall-street-fat-cats-conspiracy” kind of secret. I mean secret as in an “individual-investors-tend-not-to-know-about-these-indicators” kind of secret. But once you are done with this article, you will know about these indicators and how to use them.
Here are the five indicators you can use to help you determine when the stock market is likely to form a bottom:
– TED Spread
– Baltic Dry Index
– NYSE Margin Debt
– Bullish Percent Index
– Short Interest
The first two indicators look at the health of the global economy, and the last three look at what the major players in the stock market are actually doing with their money. So let’s get started.
The TED Spread gives you a snapshot of how healthy the global credit market is. The credit market is going to have to thaw and begin functioning in a healthy manner before the stock market can truly rebound and begin climbing again.
The TED spread measures the difference between the yield on the 3-month Treasury Bill (T-bill) and the value of the eurodollar futures contract—which is based on the 3-month LIBOR rate. To calculate the TED spread, you simply subtract the yield on the 3-month T-bill from the value of the eurodollar contract. For instance if the value of the eurodollar contract is at 3.75 percent and the yield on the 3-month T-bill is at 2.25 percent, the TED spread is 1.50 percent, or 150 basis points (3.75 – 2.25 = 1.50).
You will most likely see the TED Spread narrowing before the stock market finds a bottom.
Baltic Dry Index
The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing.
The Baltic Dry Index (BDI) is a measure of what it costs to ship raw materials—like iron ore, steel, cement, coal and so on—around the world. The Baltic Dry Index is compiled daily by The Baltic Exchange. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. Once they have obtained these numbers, they compile them and find an average.
You will most likely see a surge in the value of the Baltic Dry Index—showing a surge in production—before the stock market finds a bottom.
NYSE Margin Debt
The NYSE Margin Debt number gives you an idea of how confident stock traders are in the prospect of stocks increasing in value.
Buying stocks using borrowed money from your broker is called buying stock on margin. Every month, the New York Stock Exchange (NYSE) releases numbers showing how much money was borrowed on margin to buy stocks on the NYSE.
As you can imagine, the amount of stock bought on margin is extremely large, but the total number fluctuates quite a bit based on how confident traders are. When stock traders are confident, they borrow more on margin. When stock traders are less confident, they borrow less on margin.
You will most likely see an increase in margin borrowing once the stock market finds a bottom.
S&P 500 Bullish Percent Index
The S&P 500 Bullish Percent Index gives you a much broader picture of just how many stocks are moving higher than you can get by looking at the value of the Dow Jones Industrial Average or the S&P 500.
The S&P 500 Bullish Percent Index is a point-and-figure chart that derives its value from the point-and-figure charts of the 500 stocks that comprise the S&P 500. Here’s how it works:
– If an increasing number of those 500 stocks are showing buy signals on their point-and-figure charts, the S&P 500 Bullish Percent Index will be moving higher.
– If an increasing number of those 500 stocks are showing sell signals on their point-and-figure charts, the S&P 500 Bullish Percent Index will be moving lower.
You will most likely see a broad number of stocks—not just a few select shares—increasing in value once the stock market finds a bottom.
Monitoring the short interest in the stocks you are interested in buying will give you a good idea what the investor sentiment toward those stocks is.
Short interest is the number of shares that investors are currently short on a particular stock.
For instance, if stock traders shorted 15 million shares of a company and then covered 5 million shares by buying the stock back, the current short interest would be 10 million shares (15 million – 5 million = 10 million).
You will most likely see the short interest in major stocks decline once the stock market finds a bottom.
While no indicator is a magic bullet for identifying a market bottom, monitoring a few broad economic indicators can give you a good idea of how healthy the global economy and the stock market are.
After all, stocks go up when the companies represented by those stocks do well, and companies tend to do well when the global economy is healthy and functioning correctly.