Wednesday, August 3, 2022. Here’s a good piece of intelligence I’m sharing, and have also created a watchlist of symbols to track for future use…
“Two Indicators That Will Signal a Stock Market Bottom
Aug 2, 2022
On a cool autumn morning, a man and his dog stroll through their neighborhood park.
The two walk along together for a full hour. They start at the same place, and they end at the same place. But along the way, despite being connected by a dog leash, they take vastly different paths.
The man’s path is steady and consistent. He walks straight, rarely moving side to side. He doesn’t speed up or slow down. His pace and direction are obvious and consistent.
The dog, on the other hand, has a much different experience.
There’s no straight line or regular stride for him. He bounces from one side of the path to the other. He sits down to scratch an itch. He jumps up to meet an approaching dog. He sprints ahead to the end of his leash, pouncing on a fluttering leaf. Then he falls far behind to smell a tree.
The man is steady, predictable, reliable. The dog is erratic.
If you’ve ever wondered about the relationship between the economy and the stock market, this is it…
The man’s the economy. The dog’s the stock market.
The two are inextricably linked, but they behave in completely different ways.
The economy is slow and steady. It almost always grows a few percent a year, and even down years don’t fall by much.
The stock market, by contrast, is dramatically influenced by investor enthusiasm. It can rise 35% in one year, for no good reason, and then crash 40% the next year… with little fundamental change.
Still, both are linked. Growing profits are what allow stocks to boom. So in a terrible economy, stocks can’t soar for years on end. For that same reason, you won’t see a long-term stock market bust when the economy is strong.
Clearly, what affects the economy also affects the stock market. And right now, they’re both in bad shape.
In May, I wrote that a recession was becoming an economic inevitability. In the three months since, that has become the consensus opinion.
The most recent Bank of America Global Fund Manager Survey shows that the majority of professional money managers expect a recession. And a July Bloomberg survey shows that since March, recession odds have more than doubled to around 50%.
Meanwhile, stocks are already in a bear market. Frothy sectors are down 50% or more.
It has been a tough road for investors. And knowing that difficult economic times are ahead too just adds salt to the wound. But don’t give up yet.
You see, we’ve been through all of this before. Recessions and stock market busts are nothing new. And studying history gives us a useful guide to knowing how this painful period could play out.
So this month, we’ll look at the relationship between stocks and the economy. We’ll see what’s typical in times of upheaval like we’re experiencing today. And more importantly, we’ll cover two simple indicators that will signal both an economic downturn and a stock market bottom.
Let’s begin by looking at how stocks behave during recessions…
What We Can Expect From This Stock Market Bust
The big difference between the man and the dog is volatility.
The economy is lumbering. It’s steady. The stock market is manic. It’s always moving around… more than it probably should.
Because of that, we get plenty of bear markets, even when the economy is doing fine. Heck, one of the most brutal stock busts happened without any economic slowdown.
That was Black Monday in 1987. The S&P 500 Index fell 20% in one day. And overall, that bear market led to a 34% decline.
In total, there have been six bear markets that happened outside of recessions since 1928. Take a look…
Bear markets have become less common in the post-World-War period since 1950. But they can and do happen. Again, that dog is always scurrying around. And he’ll often find trouble without disturbing the man one bit.
However, history also shows that it’s more typical for bear markets to go hand in hand with recessions…
There are a few things to note here. First, we’ve had 13 bear markets during a recession. They’re twice as common as the nonrecession type.
Second, these kinds of bear markets tend to be more painful. The average decline is 10 percentage points more than those not accompanied by recessions. Even if you remove the 86% Great Depression bust, the average percent decline in this second table is still 37% (seven percentage points more than in the first table).
Third, these kinds of bear markets, on average, last about 50% longer than bear markets outside of recessions.
This all makes sense. The man and dog are walking the same path. So if the economy slows, we should expect stocks to follow. And we should expect the bust to be worse in that scenario.
That’s the world we’re in today. So let’s put the current bear market into context…
Stocks peaked on January 3, 2022. That means we’re seven months into this bear market. That’s about half the typical length. Similarly, stocks were down 24% at their worst. That’s just a little more than half the typical historical decline.
Much of the damage is likely done. But averages are… just averages. Every situation plays out differently. Things could still get worse from here, and the pain could last longer than any of us would prefer.
Thankfully, there’s a playbook we can follow to successfully ride out whatever waves may come our way next. This playbook is built around two simple prices that indicate when the economic recovery is beginning and when the stock market bust is ending…
Two Indicators That Will Signal a Coming Stock Bottom
Stocks are forward looking. They anticipate bad times ahead and fall before those bad times hit. But that also means they then recover before good times rematerialize.
Because of that, stocks tend to bottom before a recession comes to an end. Since 1970, that has happened five out of six times. The only outlier was the dot-com bust.
So we can expect stocks to turn around before the economic news does. But when that happens, how can we be sure the bull has truly returned and that it’s safe to buy in?
Well, we can look to two markets with a strong history of bottoming even before stocks do: investment-grade bonds and copper. Let’s cover why that happens and how each played out over the past two decades…
Investment-Grade Bonds
Investment-grade bonds are the safest bonds you can own. They come from steady, reliable companies, like Apple (AAPL), Microsoft (MSFT), and Johnson & Johnson (JNJ).
In trying times, investors sell first and ask questions later. That goes for both stocks and bonds. But the investment-grade bond market tends to recover before the S&P 500.
That’s because the only way we’d ever see major losses from investment-grade bonds is if the world as we knew it essentially ended. And while bond investors get scared right along with stock investors on bad market news or economic concerns, they also wake up much faster. They quickly realize the bad news does not, in fact, portend the end of days… leading investment-grade bonds to bottom well before stocks.
That was the case in 2002, during the final stage of the dot-com bust. Investment-grade bonds – as measured by the iShares iBoxx Investment Grade Corporate Bond Fund (LQD) – bottomed that July… a full three months ahead of stocks.
It was the same story during the financial crisis. Investment-grade bonds bottomed in October 2008… almost five months before stocks.
What’s more impressive is that by the time stocks finally did hit their low in early 2009, these bonds had already rebounded so much that they’d recovered most of their financial-crisis losses. (They did go through another correction during that time. But, importantly, they did not hit a new low alongside stocks.) Take a look…

The pandemic bust in 2020 was a bit different. It ended as quickly as it began. But even then, investment-grade bonds managed to bottom a few days before stocks did.
The trend here is clear… Investment-grade bonds have a history of bottoming before stocks. And that makes them crucial to watch right now.
Now, before we look at what investment-grade bonds are telling us in 2022, let’s look at our second indicator…
Copper
Copper is the most important industrial metal. We use it to build just about everything… from roofing and plumbing to machinery and wiring. If you want to build stuff for the modern world, you need a lot of copper.
Because of that, copper prices are sensitive to the economy. A recession means a slowdown in demand. Copper prices tend to crater when that happens.
But once again, folks realize that a recession doesn’t mean copper demand will go away for good. The copper market wises up, and prices bottom. Importantly, that tends to happen before stocks…
During the dot-com bust, copper bottomed in November 2001. By the time stocks hit their lowest point nearly a year later, copper was already back up double digits.
The story was the same during the financial crisis. Copper bottomed in December 2008, months before the overall market did. And it was reaching multimonth highs by the time stocks hit their ultimate low. Take a look…

Again, this was a powerful sign. It told us that the worst of the economic destruction had already happened and that a stock bottom was on the horizon.
Now, to be fair, copper bottomed right alongside stocks during the 2020 bear market. But that was a unique time. Things moved more quickly than any other bust in history. So we can give the metal a pass for not giving us weeks of notice.
Between investment-grade bonds and copper, we have two key indicators of when the recession and, more importantly, the bear market could be nearing their ends.
What Our Indicators Say Today…
and What It Means for Our Portfolios
Now that we know the two crucial indicators to watch, let’s see what they’re showing us right now…
LQD bottomed two days before stocks did in mid-June. There have been ups and downs since then. But overall, the trend over the past month is up.
If stocks turn down again to hit new lows but LQD continues higher, it’ll be a powerful signal that the bear market is ending soon. But we’ll need to wait and see if that plays out.
For now, it’s safest to assume investment-grade bonds have not given us a green light. And that means lower lows are likely for stocks.
As for copper, the result is clearer…
Copper prices have absolutely crashed. The metal is down more than 20% since early June. It hit its most recent bottom on July 14, a month after the stock market’s June low. Since history tells us stocks bottom after copper, the current discrepancy indicates the market bottom is likely not in yet.
Just like with LQD… if stocks turn down again to hit new lows but copper continues higher, it will be a green light to get greedy. But we’re not there yet.
Of course, like anything in the world of finance, these indicators aren’t perfect. They won’t tell us exactly when the bottom is in, but they will help us build an investment case that we can act on. Again, they’ll tell us when it’s safe to get greedy.
Right now, both LQD and copper say there are tough economic times ahead. Anyone paying attention knows that. And the S&P 500 – that crazy dog tugging on its leash – has acted like it all year.
History says what we’ve seen could get much worse. We’re not rooting for that. But knowing what’s possible makes preparing for it much easier.
In the meantime, we’ll focus on finding select areas of the market that are poised to buck the overall downtrend. And we’ll put safe investments in our portfolios to withstand tougher times on the horizon.
Not every move will work out. But thanks to the two-indicator playbook, we know where we’re headed and how things will likely go from here. That’s crucial as this bear market plays out and we inch closer to an incredible buying opportunity.
Good investing,”
I’ve created a watchlist to track corporate bonds and copper… They just turned back down only the past 2 days… let’s see where they go, and what they might say!
Harold