Nothing endures but change, Heraclitus wisely reminded a couple of millennia back, give or take. The challenge for investors in the 21st century is deciding when change has arrived. More practically, when does a bull market or bear market end? Or, if you’re thinking tactically, when does a correction or rally expire? If only there was an easy, reliable answer.
In an effort to fudge the next best thing, analysts have devised countless metrics to divine those glorious points when ebb gives way to the flow, or vice versa. Not surprisingly, your mileage will vary, since such events can only be known with certainty by way of hindsight. That’s a cute way of saying that you should do additional research beyond the analytics presented below.
With that caveat out of the way, let’s take a quick tour of one flavor of oscillator to develop a rough estimate of how several slices of financial markets are faring in a year of widespread selling. The indicator here is a simple measure of how price difference evolves in Z-scores via 50- and 200-day averages on a rolling 200-day basis. The deeper the indicator value dives into negative terrain, the closer to a bottom for the asset, at least on a near-term basis. The opposite applies for relatively high values.
Think of this indicator, which we’ll call the Peak Risk Index, as a first approximation for estimating when Mr. Market and his minions are expected to cry “uncle,” either on the upside or downside.
Let’s start with the US stock market broadly defined via the SPDR S&P 500 ETF (SPY). According to the Peak Risk Index (PRI), SPY looks close to its maximum downside price for the near term. Note, however, that lower PRI values have been posted over the years and so the relatively deep dive in progress may not be the absolute bottom. But according to the current reading, most of the selling appears to be behind us on a near-term basis. In other words, the odds of a bounce look relatively encouraging (even if it doesn’t last).
The US Treasury market (IEF) is signaling a similar profile, courtesy of PRI near its lowest levels in recent years.
US real estate investment trusts (VNQ), by contrast, have only recently entered correction territory and so the night is still young for downside behavior. No guarantees, but compared with SPY and IEF, VNQ still looks far more vulnerable to stumbling.
Finally, here’s how everyone’s favorite tech bellwhether stacks up. Invesco QQQ Trust (QQQ) has taken a beating lately and the pummeling certainly shows up in PRI. By this reading, QQQ is at its weakest level since the ETF was shellacked in early 2016. Betting that the fund is due for some relief is a calculated risk, which may or may not pay off. But according to PRI, the odds look favorable for expecting a revival in some degree and duration. ■