His tips on spotting a bear market bottom (my comments in italics):
Cash is king
At the bottom of a bear market, everyone agrees cash is the best place for your money. Even fund managers will be holding stacks of cash. This money eventually goes into the market, starting the next bull run.
Value is easy to find
Share prices, as measured by low P/E ratios, will be near to historical lows. The average dividend yield will be high, and shares may be selling at a discount to their book value. In 1975, the FTSE Ordinary Share Index stood at 146, with an average P/E of 4 (!)
Interest rates falling
Slater says interest rates have usually started falling from a high level near the end of a bear market. Lower interest rates will eventually revive economic activity.
Money supply rising
Broad money supply tends to be increasing at the turn of bear markets. Money is the lifeblood of the economy. Also, increasing supply will tend to push up asset prices.
Investment advisers are gloomy
The consensus view of advisers will be bearish. If everyone believes the market is going down, it should already have done so.
Little reaction to bad news
When bear markets stop falling on bad news, it can be a sign the market is bottoming out. Slater’s theory is that most of the weak sellers have already sold out. Shares therefore shrug off the latest bad news as long-term holders wait for better times.
There are very few new issues (IPOs) at the bottom of bear markets. Entrepreneurs with successful companies would rather wait for more optimistic markets, to get a higher price for their creations.
Press and TV comment shrinks as the public lose interest in shares. Financial articles are universally bearish, and bullish articles are ignored as the work of madmen. The classic contrast in our times is with the late 1990s tech run, when every magazine had a new billionaire CEO on the cover.
“Don’t talk to me about shares”
Nobody believes there’s any point in owning shares in a bear market, since everyone has suffered huge losses. The subject of the markets will rarely come up at parties. A good contrast would be with the property bull market that ended in 2006. Back then you could hardly reach for a bread roll before somebody declared they were buying property to let.
Changes in market leaders
Sectors that have enjoyed many years in the doldrums often start to recover, which may reveal the new leaders in the next bull market. Growth stocks also become “ridiculously cheap” according to Slater, as their P/E rating plunges to the levels of mediocre plodders. Again, think of the dotcoms – tech shares didn’t lead the 2003-2007 bull market, they handed the baton over to commodity stocks.
Upturn in the Coppock indicator
The Coppock indicator is a technical analysis tool that produces buy and sell signals for the markets. An upturn in the Coppock indicator has got a pretty good record as a strong buy signal. The Investors’ Chronicle in the UK publishes Coppock Indicator analysis.
Slater quotes a study by Matheson Securities that looked at ten stock market turning points, and found bear markets usually began on average ten months after unemployment started falling. Rapidly rising unemployment could therefore indicate a bear market is nearing its end. Presumably this would be because companies are shedding costs and becoming leaner and meaner.
Want more of Jim Slater’s wisdom? Check out his recently republished investment guide, The Zulu Principle.