Market Turnarounds - Anthony Bolton

When evaluating the market outlook, there are three things that I focus on and one
that I don’t. The one thing that I don’t look at is the economic outlook, as this 
invariably looks great at tops and horrible at bottoms. In my experience, economic
views won’t help you time markets correctly.

The first of the three factors I do look at is how the current situation compares with 
the historical pattern of bull and bear markets. That is, how long and far we have 
risen in a bull market and fallen in a bear market. When the time and scale of the rise
or fall are both high relative to historical averages, the odds of a change of trend
increase.

The second factor is indicators of investment sentiment and behaviour. These 
include: put/call ratios, the sentiment of advisers, market breadth, volatility, mutual 
fund cash positions and the exposures of hedge funds. When these indicate extreme
pessimism or optimism, it normally pays to bet against them. For example, high
volatility often precedes a change of trend.

The third factor is long-term (30-40 year) market valuations, particularly measures 
such as price-to-book value or free cash flow. Again, when these move outside their
normal range, it can signal risk or opportunity.