Stock prices are highly volatile. Some much more than others. I do a Control Panel only once a week to try to tease out the signal from the noise, to discern the underlying trend.
The entire market is influenced by Macro trends, such as a Federal Reserve decision to control inflation by raising interest rates. Investors who don’t account for this are like fisherman in small boats who don’t pay attention to the tides.
Small, overpriced companies with low (or no) profits, high borrowing and no prices are the first to be crushed when lending conditions tighten. But investors may exult when a day of volatility pops the price back up. Even when the overall trend is down.
https://discussion.fool.com/well-waddaye-know-35109097.aspx
An investor who doesn’t like volatility should look for low beta stocks. They tend to be the stodgy old companies which are scorned by investors who want high growth. High growth stocks are often volatile, which tends to obscure the underlying trend and enable “cognitive anchoring” to a higher price point which may never return.
https://www.investopedia.com/investing/beta-know-risk/
How to find a bottom?
The “mungofitch 99-day rule” won’t find the exact bottom, but it gets the investor out of the market after 99 trading days without a new high and returns the investor 99 trading days after making new highs.
I look at charts of volatility (VIX) and Financial Stress. VIX over 30 coupled with Financial Stress of 1 or higher is often a market bottom. Note the spikes in 1998 (the Asian financial crisis), 2002 (the bottom of the tech stock crash), 2008, 2011 (the European debt crisis), 2020 (Hurricane Covid).
VIX over 50 coupled with Financial Stress over 5 is a sure sign of a financial panic, a liquidity crisis so severe that the Federal Reserve is forced to loosen lending immediatly to prevent the entire system from locking up. The only examples since 1990 were 2008 and 2020. In retrospect, these were clear bottoms and fantastic buying opportunities.
https://fred.stlouisfed.org/series/VIXCLS
https://fred.stlouisfed.org/series/STLFSI3
https://fredblog.stlouisfed.org/2022/01/the-st-louis-feds-fi…
The market is currently very far from financial crisis since Financial Stress is very low. This gives the Fed plenty of leeway to raise interest rates by raising the Fed funds rate and selling longer-term Treasury and mortgage bonds. Volatility is rising but the stock market drop is not leading to a crisis so the Fed will continue its current strategy.
Fortunately, financial panics are rare. Hopefully, we won’t be seeing another one soon. It’s harder to find a bottom when the charts don’t jump up and bite you on the nose like 2008 and 2020. But even the minor bottoms come with a rise in Financial Stress over zero. This happens when lenders are more reluctant to lend so speculators can’t cheaply bid up the price of assets.
I think the coupled charts of VIX and Financial Stress are useful bottom detection tools when used together.
Wendy