What Bob Doll Predicts Stocks Will Do Next

At the same time, “I don’t see a whole lot of downside, with the asterisk next to it, ‘assuming nothing breaks.’” 

A break, such as tight liquidity getting a big bank into trouble, won’t necessarily happen, and if it does the economy can get through it, he said. “Predicting these things is impossible,” Doll said.  “It’s usually in the dark of night” and nobody anticipates it, he added.

The economy’s slowing, earnings are at risk and the Fed doesn’t appear to be done with its tightening policy, meaning the economy may be in for more pain, he said, noting “just so many unanswered questions,” such as how fast inflation will come down and how much more central banks will do to fight it.

To identify a market bottom, investors should look for “a give-up phase” — capitulation — for the VIX volatility index to hit 40, and for put-call ratios to go through the roof, he said. (The VIX ended the week at 31.36.) The put-call ratio signals a bearish market sentiment when put options to sell a security at a set price outnumber call options to buy.

Meanwhile, Doll said, “I’m moving up in big down periods.” The bull/bear ratio indicating investor sentiment has been giving a tangible sign the market is oversold and it’s time to add a little to stock positions, he added.

“With an investment backdrop of falling earnings expectations, Fed tightening, inverted yield curve, a European energy crisis, and Russia discussing the use of nuclear weapons, it is hard to be constructive on equities despite reduced valuation levels and negative sentiment,” Doll said in a new weekly commentary published today. He added, though, that stocks have already discounted a mild recession.

As for what guidance advisors can give to clients, he suggested, “Focus on what my purpose is and focus on the long term.” Advisors should keep clients from “going over the ledge,” he told ThinkAdvisor.

“This is the first time in 50 years that stocks and bonds have gone down three quarters in a row,” and John Q. Public may be tempted to get out.

“That’s probably not the right advice,” Doll added. “Use psychology if you need to at this point. Sentiment’s really important.”