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THE 2023 MARKET:
One study analyzed investor behavior – They found that “low risk-free returns caused SIGNIFICANTLY more risk taking for higher-yielding investments… Those findings begin to normalize when risk-free interest rates are higher, even WHEN the riskier investments still the same amount pay more.”
Basically, the conclusion they found was that, when risky returns earn SUBSTANTIALLY more when compared to a risk-free return…investors are more likely to go for it. But, there’s a diminishing return on safe behavior once risk-free interest rates are above 5%, meaning we could POTENTIALLY include that – the worst is behind us once risk-free rates hit 5%.
Separately, the Market Sentiment Blog pointed out that out research that – within the SP500…the top 20% of stocks account for pretty much 100% of growth. One theorized that you could identify stocks BEFORE they increased in value by looking at two factors:
One: It must be a company in the top half of their field – meaning, greater than average market cap…shares outstanding…cashflow..and sales. He found that, under those conditions – companies gave close to double the return of the SP500, while only adding slightly higher risk.
And Two: You should close attention to the Price-To-Earnings Ratio. He found that all stocks with high PE Ratios perform substantially worse than the market, while low PE ratios tend to do much better.
THE MARKET BOTTOM:
Another study found that you could look at 4 factors to determine when markets are fairly priced:
One option suggests that we look no further than the Yield Curve.
An analysis found that the bottom has NEVER occurred until the yield curve is non-inverted…and, today…we are the most inverted we’ve been in more than 40 years.
Two: The VIX.
Morgan Stanley says that “Generally speaking, we do not see bear markets bottom without panic selling, similar to what was seen in 2001 and 2020…Historically speaking, no bear market has ever bottomed without a VIX reading of 45 or more.”
Three: An Ally Invest article pointed out that – a contrarian way of finding the bottom can be all be pinpointed to: The Put To Call Ratio.
For those unaware, a CALL is bet that a stock is going to move higher…and, a PUT is a a bet that a stock will move lower…and, when the market sees 1.8 puts for every call…that’s a sign of retail capitulation, where the worst is probably already priced in.
And Four: Look at the 200-day moving average.
Ally also suggests that, when fewer than 20% of equities are trading above this threshold – the market is beginning to bottom.
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