What happens next Where's my refund? Best CD rates this month Shop and save 🤑
PERSONAL FINANCE
Investing and Investments

How to know when stocks have hit bottom

Adam Shell
USA TODAY
Investors should just hang in there.

If you don't like roller coasters or have a long-term view, ignore what's happening on Wall Street. Last Wednesday's 565-point free fall was utterly stomach-dropping. Yet the Dow Jones industrials managed to rebound and close down only 249 points. Thursday, the markets stabilized more, and investors finally got a chance to catch their breath.

So was Wednesday's wild plummet the final capitulation, or selling climax, that Wall Street pros say normally accompanies a short-term market bottom? Probably not. The bottom can only truly be hit when enough investors have decided they can't take it anymore, sell and follow the herd on out the door to washout town.

"We are probably washed out for now, but nothing is 100% in this environment," says Gary Kaltbaum, president of money-management firm Kaltbaum Capital Management.

Kaltbaum saw signs of a rebound coming Wednesday when he says he got e-mails from clients asking if they should consider shorting the market — a strategy that makes money when stocks go down — after the Dow had already plunged 2,000 points in 2016. "That's a clear sign" that selling exhaustion was near, he says.

No doubt fear is in the air on Wall Street.

"The selling is fear based," says Nick Sargen senior investment advisor at Fort Washington Investment Advisors. Investors, he says, fear defaults in the energy space and commodity exporting countries. "It is rational in that these risks have increased, which is what is being priced into markets."

But Sargen says investors shouldn't overreact, as the U.S. economy has proven "remarkably resilient to shocks." He says U.S. consumers will benefit from lower oil prices. Most important, he believes the "risks of a U.S. recession or financial crisis are low."

Scott Wren, senior strategist at Wells Fargo Investment Institute, says phones are ringing there, and the two most popular questions are when the selling will end and if we're close to a bottom. Considering the panic selling that's been going on, he says, "To us, this feels like we are in a capitulation phase. And capitulation frequently creates opportunity."

The bottom line: As hard as short-term gyrations like this are for investors to endure, in the long term it's usually a good idea to hang in there.

Featured Weekly Ad