The share market has been on a downward spiral this year.
Both the S&P/ASX 200 Index (ASX: XJO) and S&P 500 Index (INDEXSP: .INX) took significant tumbles over January.
A small revival the past few days has triggered much speculation about whether there will be further pain to come for investors or if the sell-off is about done.
There are plenty of experts who think there will be more trouble coming, and others who say it’s now time to buy up all the bargains out there.
Forager Funds chief investment officer Steve Johnson has a foot in each camp.
“Individual stocks can bottom out a long, long, long time before the overall market bottoms out,” he told a Forager webinar.
“Stock prices can fall further and harder than what we’ve seen so far, but it’s a far more attractive entry point than it was 6 and 7 months ago.”
Here’s the sign to look out for
It has been an especially brutal time for technology stocks. The NASDAQ-100 (NASDAQ: NDX) index has plummeted 12.3% this year so far.
This is because that sector has more companies that are dependent on future earnings to justify their current valuations.
Rising interest rates immediately slash future earnings for such growth businesses, so their share prices go south.
So is it time to grab all those cheap tech shares?
While no one has a crystal ball that can determine whether the stock market has “bottomed”, Johnson has one omen that he’ll be looking at.
“I don’t feel like this tech bubble is going to be properly burst until Tesla Inc (NASDAQ: TSLA)’s half the price it is today rather than still trading at US$900 bucks,” said Johnson.
“We’re not at a point where there’s widespread distress out there. But we have seen 70% and 80% falls in individual stocks.”
If it’s truly cheap, then don’t worry about timing the market
This phenomenon of specific shares being “out of synch” with the general market means investors could purchase some bargains right now, even if the bottom has not yet arrived.
Johnson took the example of the old Rams Home Loans business, which used to be listed on the ASX.
This was personally his biggest holding back in 2008 when the global financial crisis struck.
Rams shares hit their bottom on 30 June 2008, but the rest of the market continued to plunge until March 2009.
By that time, the Rams stock price had tripled.
“I think it is highly likely that you’re going to see that [in the current correction].”
The post This is how we’ll know the share market has bottomed appeared first on The Motley Fool Australia.
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