Saturday, November 29, 2008

This Month's Stock Market Is Brought to You By The Letter W

No one is perfect. I am not that smart. Yet all the signs are there for a market turnaround. I am quoting a previous blog...On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good. North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally.

If you polled most economists, they would probably speculate as to another six-nine months of economic contraction. Markets tend to come out of a protracted drop sooner than the economy - does that mean we are near the end?

Leon Tuey, Octagon Capital Corp.'s technical analyst predicts we're about to be hit by a "tsunami rally."Leon Tuey wrote in a research note Friday that "conditions are ripe" for a huge turnaround in the coming months, and that investors had best “abandon bonds and buy stocks” to take advantage."Conditions are in place for a monster rally," Mr. Tuey wrote. "There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity."

The unprecedented monetary growth and co-operation of the world's central banks will help to turn the economy around. Clearly, that's their goal.

Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic downturn.

By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it's 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.

Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in.

Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.

Wow!!! An expert (supposedly) who is going out on a limb and saying the worst is over.

“It’s going to be a really tough Christmas shopping season, but a lot of this is built into the stocks, and there is huge stimulus coming down the pipeline,” Alan Gayle, senior investment strategist at Ridgeworth Capital Management in Richmond, Virginia, said on Bloomberg Television. “We are cautiously bullish.” Ridgeworth manages $70 billion.

Wow!!! Another expert (supposedly) going out on a limb and saying the worst is over.

Martin Murenbeeld, chief economist with Dundee Wealth Management discusses in the linked video how to get out of a depression-vortex.

Wow!!! Another expert (apparently) going out on a limb and saying the worst is over.

Is it just me or are we seeing a pattern emerging?

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