By Nigam Arora
As the coronavirus has spread in the U.S., the stock market has become extraordinarily volatile.
Investors and professional money managers are having difficulty analyzing the stock market because there are no prior models similar to the scope of the coronavirus crisis.
Here is a key question: “Is there an easy, objective way to tell when the stock market bottom is likely in?” The emphasis is on “easy” and “objective.” At The Arora Report, we rely on the adaptive ZYX Asset Allocation Model with inputs in 10 categories. However, the model is complex. As far as opinions about the stock market are concerned, they are a dime a dozen.
Let’s explore the answer to the key question with the help of a chart.
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +1.34% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.39% .
Note the following:
• This is a monthly chart giving a long-term perspective to the investors.
• The relative strength index (RSI) shown on the chart is a measure of internal momentum of the price series being plotted, in this case Dow Jones Industrial Average.
• In the middle pane on the chart, the white horizontal line shows traditional oversold levels in RSI.
• The chart shows that RSI, at present, is very oversold.
• In ordinary times, an oversold stock market tends to bounce, but these are no ordinary times.
• In the middle pane, the chart shows in green the RSI level at the last major bottom in March 2009. This also coincides with the Arora buy signal given in March 2009 for aggressive buying that turned out to be the start of the long bull market.
• To learn more about the support zones shown on the chart, please click here.
The easy, objective way
The easy, objective way — with a bigger emphasis on “objective” — to tell if the stock market bottom is in is to look for RSI on a monthly chart reaching or approaching the RSI level seen at the last major bottom, as shown on the chart, and starting to move up. For confirmation, consider doing similar analysis on two large-cap technology stocks (Apple /zigman2/quotes/202934861/composite AAPL +0.36% and Amazon.com /zigman2/quotes/210331248/composite AMZN +2.11% ), two semiconductor stocks (Advanced Micro Devices /zigman2/quotes/208144392/composite AMD +0.32% and Intel /zigman2/quotes/203649727/composite INTC -0.43% ), two airline stocks (American Airlines /zigman2/quotes/209207041/composite AAL +9.50% and Southwest /zigman2/quotes/201071949/composite LUV +4.20% ), and two bank stocks (J.P. Morgan /zigman2/quotes/205971034/composite JPM +1.74% and Bank of America /zigman2/quotes/200894270/composite BAC +1.52% ).
As a further confirmation, look for very heavy volume.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.