How do you know when a stock has hit the floor amid a string of bad news? TheStreet's Jim Cramer explains in his Five Ways to Spot a Market Bottom during a live video-conference call Thursday with members of his Action Alerts PLUS club for investors.
"Be cognizant," said Cramer, "that when there's a persistent parade of bad corporate news but the stock stops going down after the reports, then you probably have a bottom on your hands."
Knowing when a stock hits bottom can help investors know when to snap up shares at a low cost, cutting risk of losing on the buy.
Facebook (FB) -- which continues to get bad press -- is a good example of a stock that mostly hit bottom last year, and then began gaining again, he said.
"There were moments last year when I was afraid to pick up the paper lest I read one more story about how Facebook was two-timing the world. The stories were relentless," said Cramer.
Scandals linked to the social media giant rolled out in March last year, first with reports connecting Facebook to the spread of hateful language about the Rohingya Muslims in Myanmar. Then, later the same month, the Cambridge Analytica story broke as it was revealed the company gained access to personal information of tens of millions of Facebook users. Congressional hearings followed, as did more news of Russian trolling on the social media site and other bad press.
"Each time they knocked the stock down," said Cramer.
But then, by the end of December, the stock stopped going down dramatically.
"If you go over Facebook's press clips at the time there were all about how the problems of Facebook, as myriad and horrid as they were, just got worse. But the stock didn't react."
Shares mostly stabilized. They were hitting bottom, said Cramer.
At that point, all it took was some good news for shares to rise again, because it shed so many sellers, he said.
"And that's just what happened here," said Cramer. "So remember, when a stock stops going down on negative news, you have a the possibility of a very good, lasting bottom."
And the bad news has continued, but not big drops. Earlier this week it was revealed in the New York Times that criminal indictments had come from the Eastern District of New York against Facebook. But even with those bumps, shares are still up significantly from Dec. 17 of last year.
"Those will not hurt the stock beyond today's headlines," said Cramer.
Cramer and the AAP team are looking at opportunities for growth in their portfolio. Find out what they're telling their investment club members and get in on the conversation with a free trial subscription to Action Alerts Plus.
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