How do you know when the stock market has bottomed?

"Trying to catch the bottom on a falling stock……is like trying to catch a falling knife." So said Peter Lynch, the legendary Magellan Fund manager and billionaire philanthropist.

The same could be said for stock markets as a whole. Very few people time it well, and putting your money in within 10 percent of the bottom is considered good.

Why is ‘picking the bottom’ so prized? Say you’d bought in to the S&P 500 in February 2009, when economies were still in a tailspin following the market crash of 2008. If you’d stayed invested, even without dividends you would have quadrupled your money.

Fortunes are to be made when others are most fearful, but what are the signs to look for to know when markets have hit bottom and are about to turn upwards? Ben Griffiths, co-founder of Australian fund manager Eley Griffiths, has some tips.

An obvious sign is when professional money managers slash their equity allocations and put all their funds into cash.

Another is when media reporting gets extreme. When headlines say all hope is lost, or that markets won’t recover for a decade, take it as a contrarian signal to consider buying.

Wait for profit warnings. When a company’s stock rallies from a slump after a profit warning, take it as a sign that bad news is so absorbed into a share price that it’s unlikely to go down.

The playlist for every correction is the same, says Griffiths: Retain lots of cash, and have a shopping list. When you think the market has bottomed, and your target companies seem very good value, then buy.

“Quality always rises first”. Penny dreadfuls and the fashionable growth stocks that were riding high before the crash – these are usually the last to recover. The first to recover are the high-quality names with good balance sheets.

Two final things to look for: 1) Fiscal stimulus: if government is supporting the recovery, cyclical stocks (e.g. housing, commodities) will rise. 2) Credit markets: the smartest people work in credit. If corporate and consumer credit expands, it’s safe to reenter the market.