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The Market is Putting In a Significant Bottom

Yes, I said it. The market is putting in a significant bottom – maybe not the bottom but certainly an intermediate bottom from which we can rally significantly (up to the 200-day moving average).

Why do I think this?

Equity Valuation: per Doug Kass, based upon normalized earnings, stocks tend to trade on average at 15X multiple of normalized earnings; currently we are at 10X normalized earnings.

US Economy Beginning to Trough: most economists are forecasting that the worst of the economic numbers will be during the first quarter of 2009, with improvement beginning after that.

Pervasive Negativity: you can't turn on the TV or read a newspaper without hearing how the stock market is headed to zero. The AAII shows that it's members are + 70% Bearish, a record. Such negativity means that a significant number of people are either short stocks or are in cash. Any rally will bring them in from the sidelines to participate in the upside.

Stock Market's Discount the Future: stock prices started going down as investors sold in anticipation of a bad economy. Now that everyone knows the economy is bad and if we are in fact making an economic trough, the market will begin to anticipate better economic news and move higher.

Improving Operating Environment for Financial Stocks: Citigroup is reporting today that they have positive year-to-date earnings. If they can do it, what about the well run financials? They likely are having even better results.

Government Intervention: the government has been intervening into the financial markets in a significant way – finally, there are two items that may have an immediate impact: (1) Mark to Market may be suspended, which will stop the erosion of capital; and (2) the Uptick Rule may be re-instated which will prevent short sellers from continuously hammering the stock price of a bank down without the price first moving up. Plus, Fed Chairman Bernanke is calling for forbearance on the banks in congressional testimony with a mark to market change.

Bank Rescue Plan: the first indications of the government's actions under a bank rescue plan are coming to light – the public/private partnerships which will be used to purchase the subprime assets from the banks.

Leading Indicators: If you look at two early indicators of economic activity, Copper and Oil, both are moving higher. Copper broke above strong technical resistance and is showing that there is demand for this metal. Oil is breaking above its downtrend and showing that demand is increasing.

China's Economic Stimulus: all indications are that China's stimulus is having a positive impact – its various economic statistics are turning positive and the Shanghai stock market is roaring ahead.

Technical Indicators: various technical indicators show that the market is at extremely oversold conditions: Stocks Above their 40-day Moving Average (historic low); Stock Indices dropping to 12-year lows (only happened twice before and both times it ended the bear markets); 62% Retracement of Reagan Bull Market (we have hit a statistically significant pullback level in the stock market – from the beginning of the bull caused by Reagan's economic policies to the 2000 top, we have fallen 62% of that bull market advance).

We are putting in a sustainable bottom – this may not be the beginning of a new bull market in stocks, but we should see a strong bear market rally in coming sessions.

Mark