Since March 10th, we’ve spent a fair amount of time talking about the possibility that the lows of this bear market have been seen. And while we continue believe that this might just be the case, we should point out that the only way to know for sure when such an event occurs is with a healthy dose of hindsight.
So, why bother sticking our necks out and making a “market call?” In short, our belief is that investors should strive to be more bullish than the crowd at bear market bottoms and more skeptical than everyone else at bull market tops. But to clarify, we are NOT talking about trying to time the market here. No, we are talking about one’s overall outlook toward the market, which, of course, drives their investment strategy.
As we talked about last week, my recollection is that approximately one-half a bull market’s gains come during the first one-third of the bull market cycle. So, if your strategy is to wait to “feel better” about things before deciding to invest again, you are run a big risk of missing a huge part of the next bull market!
Thus, the reason for making “a call” is to try and convince people that it is time to change their thinking. And while this may or may not turn out to be the perfect time to buy stocks, it IS the time to start thinking about getting back into the pool.
What’s Left to Discount?
The bears have been telling us that the economy is a disaster and that things are likely to get worse before they get better. Heck, even the President, whose job is to try and rally the nation right about now, has been using this line early and often lately. But, let’s remember that the stock market is a discounting mechanism that looks forward and not back.
The point is that the declines of -53.8% in the DJIA, -56.8% for the S&P 500, and -59.9% in the Russell 2000 (the declines are measured from each index’s 2007 high through the lows on March 9, 2009) represent a VERY large degree of discounting of future negatives. Remember, the current decline in the DJIA is the second worst on record since 1900 – and is eclipsed only by the -86.0% plunge from 4/17/1930 through 7/8/1932. (For you stat freaks out there, we’re defining a bear market as a 30% decline in the DJIA after 50 calendar days or a 13% decline after 145 days.)
Thus, it is easy to opine that the current bear has discounted everything except the Great Depression. And with Mr. Bernanke and his central banker buddies around the globe now committed to doing anything and everything to avoid a replay of the 1929-32 debacle, it occurs to us that this may not be the best time to be looking for things to get a lot worse.
In addition, we have suggested at least a couple of times over the past six months that the stock market plunge was discounting the potential collapse in the banking system. And as Ben Bernanke said on “60 Minutes” last week, we came “very close” to witnessing just such a financial disaster.
However, it is also clear that the U.S. Government and the Fed have gone to great lengths to make sure that the banking system stays afloat. They’ve provided the emergency capital the big banks needed to stay in business. The Fed has cut rates to 0% so as to give the banks a massive profit margin (borrowing at 0% and lending at 5% seems like a pretty good gig if you can get it). One way or another, the government IS going to start buying the toxic assets eating away at bank capital. And on that note, FASB has finally figured out that there needs to be some adjustments made in their accounting rules in terms of marking all assets to market all the time.
When you add it up, it is fairly easy to see that the majority of banks still standing right now ought to be okay going forward. So, the idea of a banking collapse is off the table.
The bears next favorite topic is the housing market. While it is true that the housing market has seen a massive drop, it is also true that buyers are beginning to materialize. And without going into great detail, let’s also recognize that the Fed is on a mission to drive mortgage rates down and that the government, whether you agree with their approach or not, is attempting to throw money at the problem of falling home values. So expecting the housing market to get worse is a little like declaring that NOW is the time to start shorting stocks.
Finally, our furry friends are fond of picking on the economy. But the bottom line here is that unless Congress gets insanely stupid (which, of course, isn’t out of the realm of possibilities), the economy will indeed recover. And since stock prices have already discounted one of the worst recessions in history, it is hard to see why we should be expecting things to get worse.
Signals Starting To Flash Green
Since we run the risk of going on for cyber-pages here, we’re going to try and keep the rest of the report short and to the point. So for starters, we do need to point out that this is not exactly the first bear market in history. As such, we can look back at prior declines and try to identify what has been required to turn the game around.
While it is easy to offer up prognostications, which may or may not materialize, it is infinitely smarter to look at cold, hard numbers when trying to make a case for when a market turn is more than just another bounce.
Without boring you with large volumes of data and more indicators than you would care to count, we want to point out that the majority of the indicators we follow (75% to be exact) which are designed to call the end of a bear market are now flashing green.
However, there is a very big distinction between the end of a bear and the beginning of a bull market. And while the indicators we follow do suggest that this bear is about over, we do not yet have confirmation that a new bull market has begun or will begin imminently.
What’s The Plan?
The point to this week’s missive is that the game may be changing. Therefore, you will need to make a corresponding adjustment in your strategy. Instead of playing defense, raising cash during rallies, and standing on the sidelines, it is now time to be looking for opportunities to “buy the dips.”
Given the severity of the current bear, it is very unlikely that we will see a “V” bottom, where stocks just blast straight up for months. No, we would expect to see something more along the lines of a “W” or even
