Is It Time to Buy Stocks on Pullbacks?

We have reached at least an interim bottom in the markets. I would call it "The Bottom" once the S&P 500 moves above the 1325 level. That's not to say there won't be a pull back. After an upside move like we've had over last Thursday and Friday, the markets will likely consolidate. I would buy that and any subsequent dips.

All the variables that I normally look for in identifying a bottom—volume, panic, pessimism, new lows, and market breadth-- were satisfied over the course of the market's downturn last week. However, it is the rescue plan that is now being drafted by the federal government that has tipped me over to the side of the bulls. Up until now, the Fed and Treasury have been acting like two fire fighters working furiously to save three or four trees while the forest around them was burning to the ground. Now they're calling in air support.

The proposed plan would establish an entity reminiscent of the Resolution Trust, which was established in the aftermath of the Savings and Loan Crises of the 1980s. That government-owned asset management company was charged with liquidating the bad real estate and mortgage loan assets it assumed from hundreds of bankrupt S&Ls.

Naturally the circumstances and sheer weight of today's financial system far exceeds anything we encountered in the Eighties so there will be major differences. Nevertheless, it is an important first step in establishing a comprehensive approach. I believe it will work.

A second proposal would insure that the nation's $3.4 trillion in money market funds would be protected via a government insurance plan similar to the exiting FDIC guarantee. This proposal is in response to a run on money markets earlier in the week. Panicky investors, spooked by the government's takeover of 80% of AIG Insurance (AIG), started pulling cash out of these usually safe haven funds fearing money markets were the next domino to fall. This proposal is also right on.

In addition, the SEC, following the action of its UK equivalent, temporarily banned short selling (selling stocks you don't own) on 799 financial companies. That initiative was partially responsible for the almost 10% move in the markets over the last two days. I say partially because the markets were vastly oversold by Thursday when it reached at bottom at 1133 on the S&P 500. At that point, stretched like a rubber band, the index snapped back at breath-taking speed. Friday it closed at 1255 just a point lower than at the end of last week.

I fully expect the majority of investors to remain cautious and skeptical. The proposed plan will be met by opposition in some quarters because, after all, this is an election year. The Bears, who have a vested interest in the market continuing its downward trend, will pull it apart, point out every flaw and cry victory on every dip. Ignore them. As an unapologetic contrarian, I say buy the dips, keep some cash to the side for opportunities and rest easy. We've come through another one.

Disclosure: None.

Comments

[Jim Hawthorne:]

Whoa! While there may be some validity in your advice to 'buy the dips', this is simply based on market technicals rather than any real fundamental shift equity valuation!
Have you considered that there are some very good fundamental reasons why traders remain 'nervous and skeptical', even after the 10% rise Thursday through Friday?
By the way, your analysis completely ignored the price action of Friday's market, which gapped up at the open and failed to hold! In reality, a 5-min intraday view of Friday was less than encouraging for the bulls!

The fact of the matter is that this $1Trillion bailout boondoggle has the vast majority of investor/traders more than just 'nervous and skeptical'!
I will suggest that the true 'contrarians' for the most part remained on the sidelines during Friday's panic buying and did some cautious nibbling on energy plays today.
While there may well be some technical and emotional indications for broad buying into the markets right now, the are NO fundamental ones, and that renders any broad buying now an investment strategy based solely on hope and prayers...
No thanks!

2008 Sep 22 05:07 PM

[anarchist:]

What you said Jim Hawthorne. This bailout has to be, conservativly speaking, inflationary and eventually will bloody the nose of the dollar and thus increase the price of oil for a long time to come. The broader market now has been taken out of the realm of investing and into the relm of the casino.

2008 Sep 22 10:38 PM