Last Thursday Was the Bottom - It's Time to Get Back in 109 comments
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Last Thursday, November 20, was the lowest finish for the market since the bear began last October. Since then we have had four consecutive double-digit gains, something that has happened only 45 times in the history of the market, dating back to 1896.
So was last Thursday the bottom? I think it was.
Much has been written over the last few months about how to tell when this market would hit bottom. Several well-done pieces noted the five (or six, or ten) signs that the market has bottomed out and noted that nearly all were in place a month or more ago. For instance, more than one essayist argued that when a "Perma-bear," such as Jeremy Grantham, begins talking bullishly about the market, that is a surefire sign of a bottom. Gratham has indeed argued the current market is more favorable for the equity investor than any he has seen since 1982. Other essayists focused on technical indicators, capitulation, mutual fund outflows, and other factors, most of which seem to have been present for some time.
However, the one historically consistent sign of a market bottom that has not been in place heretofore has been the market's discounting of bad news. That missing element finally appeared on Wednesday, November 26, when a stream of bad news came over the wire before the opening about weak durable goods orders and other negative factors.
But for the first time in months, negative news did not take the markets lower. Though stock futures pointed lower Wednesday morning, and though the market started down more than 100 points following the opening bell, the market quickly began a surge northward and finished more than 250 points above its Tuesday close. There was no positive news to account for this determined show of optimism, unless you want to count the official announcement of Paul Volcker's appointment to head a new committee of economists advising Barack Obama-- an appointment that has been hinted at for weeks, and it therefore appears that this bear market has finally gotten tired of dropping and intends to rise regardless of the news. Together with the various factors discussed above and elsewhere, that is the unmistakable sign of a market bottom. Another is the breadth of the bounce, which has affected nearly all sectors-- including, notably, the financials. Bank of America (BAC) is up more than 25% from its low, and even poor old Citigroup (C) has bounced back.
But doesn't the continued weakness in the economy mean that this cannot be a true bottom and is instead a dead-cat bounce? Not at all. The market always starts its upwards move months before a bad economy has even bottomed. In his book Stocks for the Long Run, Jeremy Siegel documents how the bottom of the market always precedes the trough in the economy as a whole, typically by 4 to 6 months, and on average by 5.1 months. Looking at the current downturn, it makes sense that we would be at or near the bottom at this point in the cycle. We have been in a recession for two quarters, and it is likely that we will continue to be for two more quarters. A one year recession would be one of the longest in the postwar period. But if the trough in the economy occurs late next spring or early next summer, as most economists believe, that would mean we should expect a market bottom around here.
In short, it's time to get back in. I am buying good companies that have been unfairly beaten down over the last few months and now sell at substantial discounts to book value-- companies like shallow-water driller Hercules Offshore (HERO), dry bulk shipper Dryships (DRYS), and solid financials like Bank of America (BAC) that look like they will not only survive but thrive after the shakeout.
One word of caution, however; I suspect the coming bull-- whether you consider it secular or cyclical-- will be short-lived. The feds have force-fed the economy with three-plus trillion dollars in the last few months, and as soon as the crisis is over and the economy seems stable, expect the Fed to begin tightening to keep inflation from running wild-- with correspondingly negative effects for the market as a whole. In short, buy aggressively here, but keep trailing stops on your big buys and be ready to move into gold and TIPS when the bill for the bailout begins to come due next year or in 2010.
Disclosure: Author holds long positions in BAC, C, HERO and DRYS
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"In short, it's time to get back in. I am buying good companies that have been unfairly beaten down ... companies like shallow-water driller Hercules Offshore (HERO), dry bulk shipper Dryships (DRYS), and solid financials like Bank of America (BAC)"
which sounds like you do not yet have them but will buy since you think market have bottomed.
But the disclosure says;
"Disclosure: Author holds long positions in BAC, C, HERO and DRYS"
Which tells me you already bought these shares. So you are here to pump shares you already own. Will you be here telling people to sell before you sell? Or are you just a stock pimp?
Something here has hit bottom, that's a fact, but it may not be the market!
If you've been long the stocks you're recommending (BAC, C, HERO and DRYS) for more than a week or so, then your post is most disingenuous. Either way, your investment strategy appears to revolve around HOPE and little else.
Market bottoms are processes more than they are singular events. This is a time for nibbles rather than big bites, and nimble, disciplined trading with a very watchful eye on risk management and capital preservation!
Jeremy Siegel's BUY & HOLD strategy and the research that supports it belong to the last bull market that came to an end with the 1998-2000 topping processes. You'll have a very tough time convincing many folks here that BUY & HOLD in a post 1999 investing world is much of an investing strategy. Even your friend Jeremy has begun to backtrack!
Not much more upside left. Stock pimpers bid it up to get out.
On Nov 28 08:41 AM Jim Hawthorne wrote:
> ^^Shakeout??? You call this past year a shakeout???^^
>
> Something here has hit bottom, that's a fact, but it may not be the
> market!
>
> If you've been long the stocks you're recommending (BAC, C, HERO
> and DRYS) for more than a week or so, then your post is most disingenuous.
> Either way, your investment strategy appears to revolve around HOPE
> and little else.
>
> Market bottoms are processes more than they are singular events.
> This is a time for nibbles rather than big bites, and nimble, disciplined
> trading with a very watchful eye on risk management and capital preservation!
>
>
> Jeremy Siegel's BUY & HOLD strategy and the research that supports
> it belong to the last bull market that came to an end with the 1998-2000
> topping processes. You'll have a very tough time convincing many
> folks here that BUY & HOLD in a post 1999 investing world is
> much of an investing strategy. Even your friend Jeremy has begun
> to backtrack!
What little I know about water transport stocks scares me, and that is volatile prices, spot markets, and ship inventories. Good dividends when times are good, though.
Oil? Well, anybody that doesn't believe oil will come back is crazy. The bottom we are seeing here has delayed people solving the problem of oil dependency, so we're no better off than we were before. Demand is down now, but will return when things perk up a bit, and any sign of shortage lures investors and hedgers into the market. I mean, a barrel could be $100 in March--it's just that volatile.
And you are saying that all these things are probably going to turn around in the next 6 mo?
Just because the world's governments are throwing money around and the market bounces up a little, doesn't mean anything except that there are a lot of impatient investors who really, really, really want to make some money right now. So what else is new?
This isn't a normal recession we're heading into, and it cannot be realistically compared to any of the recent recessions. This one is very different and the bottom is nowhere in sight.
I find it quite unbelievable that anyone could say (at this point during this mess) that we have seen the bottom and it's time to buy. Good luck!
Personally I think we will be in a trading market for some time to come. There has been too much damage done in this economy to think it's "up, up and away" for a few years from this point in time.
On Nov 28 09:48 AM You're Kidding wrote:
> I think you are dreaming. The worldwide macro economic situation
> is absolutely horrible and getting worse all the time. Have housing
> prices stabilized? Hardly. Has the derivatives market leverage unwound
> yet? Its hardly gotten started. Are the unemployment, bankruptcy,
> and bank failure rates going down now? They've just started going
> up. Do the people in charge of fixing things know what they are doing?
> Ya think?
>
> And you are saying that all these things are probably going to turn
> around in the next 6 mo?
>
> Just because the world's governments are throwing money around and
> the market bounces up a little, doesn't mean anything except that
> there are a lot of impatient investors who really, really, really
> want to make some money right now. So what else is new?
>
> This isn't a normal recession we're heading into, and it cannot be
> realistically compared to any of the recent recessions. This one
> is very different and the bottom is nowhere in sight.
The point about not reacting to bad news is well taken.
Only time will tell.