"There is a major market low once a decade, on average, and investors should be proactive in identifying buy signals," Bank of America said.
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The shift from a bear market to a new bull market is often marked by three clear signals, offering investors an opportunity to identify the perfect time to buy stocks.
That's according to a Tuesday note from Bank of America, which identified the signals investors should start looking for after the Nasdaq 100 surged 20% from its 2022 low, officially marking the start of a new bull market rally.
And there's good reason why investors should pay attention. Based on an analysis of 16 recessionary bear markets since 1871, returns after recessionary lows averaged 21% annually, compared to just 9% when buying at any time, according to the note.
"There is a major market low once a decade, on average, and investors should be proactive in identifying buy signals," BofA said. "Good indicators for market lows should be reliable, reflective of the economy, and relatively fast-moving."
That's why it doesn't pay for investors to follow the official NBER recession determination, as it can take anywhere from 4 to 21 months to trigger after a recession has officially ended.
"NBER announced in July 2021 that the 2020 recession ended in April 2020. An investor who waited for official confirmation would have missed 80% of the post-Covid rally.
Instead, investors should follow these three reliable signals that, when flashed, suggest the next bull market in stocks has arrived.
"The year-over-year percent change in S&P 500 trailing earnings typically troughs in the month after the market finds support," BofA said.
And according to the bank, there's still more pain to come on the earnings front, suggesting the bottom in stocks has not yet been found.
"A simple estimate using surveys of manufacturers and credit managers implies a 7% decline in S&P 500 earnings, similar to our equity team's -9% forecast," BofA said. "S&P 500 earnings recession still to come."
Bank of America
"The 10-month moving average is a pure price metric. The S&P 500 index price reliably crosses above its 10-month average four months after a big market low. The S&P 500 crossed above that threshold in January of this year, but we would not be surprised to see it fall below again if economic conditions deteriorate," BofA said.
The 10-month moving average currently sits at about 3,970, or about 120 points below the S&P 500's current price of 4,098.
Bank of America
"The unemployment rate typically peaks four months after big lows. The recessionary bear market in 1962 is the exception. Our economists expect a peak of 4.8% in the second quarter of 2024, up from 3.6% today," BofA said. "Peak unemployment is one of the best 'all-clear' signals."
It's going to take a wave of job layoffs for the unemployment rate to surge higher, and so far, that hasn't happened.
If investors wait for the three signals to flash, it's almost a certainty that they will miss the beginning stage of the rally off the low, but BofA says that's ok.
"Investor confidence should increase as these indicators start to signal recovery. Waiting four months after a market bottom usually means giving up about 15% of the early-stage rally. This is a relatively small price to pay for increased confidence in positioning for the >300% returns until the next market peak," BofA said.
Bank of America
