5 Ways to Spot Market Tops and Bottoms
WITH PSYCHOLOGICAL MARKET INDICATORS
To be successful in the stock market, Investors should always be looking at the big picture: is the market in an uptrend or a downtrend? Bull and bear markets are broad ways of signaling if it’s a good time or a risky time to buy stocks.
But what about other indicators that flag when the market has peaked or is ready to rebound?
You have to know the signs that a change is imminent. The market direction itself is the primary indicator, but there are 5 psychological market indicators that give you an added edge. These signs have historically been good predictors of when a correction will end or a market may be topping.
Watch these indicators, and if several begin to flash signals that a top or bottom is near, prepare your portfolio accordingly.
VIX estimates expected volatility based on S&P 500 option prices. When fear rules Wall Street, volatility surges in the stock market, which is typically the time the major indexes will hit bottom and rally higher.
TIP: Look for the VIX to rise more than 20% above its 10-day moving average, which can confirm a positive reversal.
High-Low Ratio looks at the ratio of the new price highs to new price lows. It can flag rebounds from intermediate corrections during bull markets.
TIP: When the indicator shows its first up day after crossing below 0.5, look for a short-term bottom in an intermediate correction during a bull market.
Margin Debt is the amount borrowed when buying on margin. Essentially, a trader is paying for part of the asset with their own money and borrowing the other part from the broker. Keep an eye on year-over-year percentage change in total margin debt—it can flag major tops in bull markets.
TIP: Margin Debt will exceed 55% when optimism runs rampant on Wall Street and investors are borrowing heavily during the late stages of a bull market.
Put-Call Ratio compares the total number of put options (bearish outlook) traded each day with the total number of call options (bullish outlook). It helps determine major and short-term market bottoms.
TIP: The ratio will surge above 1.0 when investors turn bearish and buy more puts than calls. A reading above 1.15 can confirm a positive reversal in the S&P 500 or Nasdaq.
Bulls vs. Bears
Bulls vs. Bears is a weekly survey of newsletter writers published by Investors Intelligence.
TIP: When the percentage of bears crosses above the bulls, a market bottom is more likely.
Want one place to track all of these indicators?
The Psychological Market Indicators on Investors.com has you covered. You can access all of these indicators, including charts of their activity, from one convenient page with your IBD Digital subscription.
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