Nobody rings a bell at the bottom of a bear market, goes the old Wall Street adage, but there are plenty of indicators investors can monitor in the hope of divining when a bottom might occur. The key to judging this accurately is to avoid relying on one or two indicators. Instead, use several in combination because while some may be sending clear messages that the bottom is at hand, others may predict something else entirely; it’s the degree of divergence between the indicators you examine that will help you determine where the market’s headed. Let’s take a look at 15 indicators that can help you determine whether the market has hit bottom, or is still falling.

Are We There Yet?

The levels reached by the indicators at the bottom of past bear markets are commonly used as signposts for current bear markets. Unfortunately, history doesn’t always repeat the same way. In the bear market of 2008, for example, the epochal nature of the financial crisis produced readings that were off the charts for many indicators, and far beyond their predictive thresholds.

Although indicator readings associated with past bottoms may only be instructive during typical bear markets, their direction and rates of change may still help during the more severe bear markets. Specifically, when they decline from their peaks and gather momentum on the downside, recovery mode is likely unfolding. (For ways to get through a down market, read Surviving Bear Country .)

There is always a great deal of interest in when the stock market might bottom. Many investors with a trading approach look for the best time to commit money to the market. They don’t want to try to catch a falling knife .

However, the average investor, who is busy with family and career, should be wary of such market timing. Academic studies have shown they are better off buying and holding the market through index funds or exchange-traded funds (ETFs) and rebalancing at intervals.

Of course, if the average investor can start investing or rebalancing in the depths of a bear market, this should enhance long-run returns. The indicators may thus be helpful in providing a more objective picture of market conditions and the periods when increasing exposure to equities are more likely to enhance long-term returns (not so much the exact bottom).

Types of Indicators

The indicators are grouped into the following five types:

1. Market Sentiment. Heightened pessimism signals proximity to the trough
2. Technical Analysis. Extremely oversold markets are more likely to snap back
3. Credit Markets. Markets struggle when bankers/bond markets are skittish
4. Valuation. Bear markets face an uphill climb if valuations are still high
5. Economic Indicators. The economy can sustain a rally off the bottom

Market Sentiment

Investors who want to look at market sentiment should consider the following indicators:

Investor Intelligence Sentiment Survey: This weekly survey monitors the market sentiment of more than 100 independent investment newsletters. When the bull and bear spread (percentage of bullish less bearish advisors) falls to -20 or thereabouts, pessimistic sentiment is at its peak, which usually heralds a bottom in the market. An example would be 30% bullish and 50% bearish (with 20% neutral). There are several other sentiment gauges, including the American Association of Individual Investors (AAII) survey and TickerSense’s blogger survey. (For related reading, see Investors Intelligence Sentiment Index .)

Technical Analysis

Investors who want to look at technical analysis should consider the following indicators:

Historical Milestones: Past market bottoms, on average, take three to six months to complete. They are characterized by a volatile trading range and tests of the low. A capitulation event usually occurs, and is evident by steep price declines on abnormally high trading volumes. Dramatic intraday reversals make appearances. Another milestone is when the market stops reacting to bad news. The bottoming out process finishes with a strong breakout on heavy volume. (For related reading, see The Anatomy Of Trading Breakouts .)

Relative Strength Index (RSI): The RSI compares the average daily gain in a stock or index to its average daily loss over the past 14 days (or other period). It is mathematically transformed to vary between 0 and 100. When the average daily gain falls relative to the average daily loss and brings the RSI down to 30, it’s a sign of significantly oversold conditions. When calculated for the S&P 500 Index, it may mean the market is close to bottoming out. (For more information, see Getting to Know Oscillators: Relative Strength Index .)

Credit Markets

Investors who want to look at credit markets should consider the following indicators:

TED Spread: The TED spread is the difference in yields between three-month interbank (LIBOR ) loans and three-month U.S.Treasury bills (T-bills). When financial stress rises and banks become less willing to lend to each other, interbank loan rates climb relative to T-bill rates (perceived as risk free). The wider the spread becomes, the greater the likelihood of a credit crunch that spreads deflationary impulses to the economy. Historically, spreads over 100 basis points were indicative of a peak, although they did shoot up above 250 basis points during the crash of 1987 and more than 450 basis points (highest till that date) during the financial crisis of 2008.

Valuation

Investors who want to look at valuation should consider the following indicators:

• Price-Earnings Ratios (P/E Ratio): Valuation measures for stocks, such as the P/E ratio, may not be timely indicators but nonetheless provide context, especially for investors focused on the long-term. A complication is the range of formulations possible. One of the simplest is the S&P 500 P/E ratio based on trailing fourth-quarter earnings per share (EPS). During major bear markets since 1937, it has bottomed out at an average of 50% below its long-term average of around 17 times earnings.

More sophisticated versions, such as Capital Economics’ S&P 500 P/E ratio adjusted for inflation and business cycles (using the 10-year average of earnings), show similar overshooting: during the 14 recessions since 1923, it bottomed (on average) at 11 times earnings, 35% below the long-term average of 17 times. Other valuation yardsticks can be used, such as Tobin’s Q ratio. which compares market values to replacement costs; its lower boundary is 0.5.

Macroeconomic

Investors who want to look at valuation should consider the following indicators:

Historic Patterns: Since World War II, recessions in the U.S. have averaged just over a year. Knowing when the current recession started may assist with calling a bottom, since stock markets traditionally rally two to six months before the end of a recession.

Consumer Confidence Index (CCI): In the last week of each month, the Conference Board publishes the CCI. which is based on interview data obtained from a representative sample of 5,000 U.S. households. The index is an average of responses to questions eliciting opinions on current and expected business conditions, current and expected employment conditions and expected family income. Whenever the CCI falls to 60, it has usually indicated a bottom for the stock market, but in 2008 it plunged below 40. (Read more on this highly regarded survey in Economic Indicators: Consumer Confidence Index (CCI) .)

Revisions to Earnings Estimates: During economic downturns, brokerage analysts making bottom-up estimates of company earnings typically lag strategists who issue earnings estimates for market indexes. The strategists, who are more attuned to macroeconomic developments, are usually the ones who have it right during downturns. The bottom-up analysts therefore need to revise their estimates downward to at least be in line with strategists’ estimates before the market can bottom. (Learn how this key metric is calculated and how it is used to judge market performance, read Earnings Forecasts: A Primer .)

The Bottom Line