Steven Benharris'  Instablog

Nver fails. The most dominant advice from the financial media when October began was to sell, especially to sell commodities and banks. October will end with the biggest monthly point gain in the history of the Dow Jones index. The percent bullish on The S&P index, which had fallen to 21.8% on October 4th, closed Friday at 77.8%, recording a 257% gain in 18 trading sessions, impressive indeed.

The VIX has dropped from 45.45 on October 3^rd to close at 24.53 on Friday, losing 46% of it level in less than four weeks, as fear seeps out of the market, and greed slowly begins to work it’s way in. Remember, the time to buy is when the VIX is high, when everyone is in panic mode.

In the past couple days, I’ve read posts from two bloggers or newsletter authors who had authored extremely negative advice during the first couple of days of October, now expressing their bullishness. Here’s what the talking heads on televeison are spouting now.:

“It’s not too late get in now. Fund managers are going to be forced to buy in to chase performance and push prices higher, blah, blah, blah”. Yeah. Bite me.

This has been a trading market, with large swings in both directions. If you haven’t taken some chips off the table in the past couple trading sessions, you’re being a bit piggy.

 

 

 

 

“I’m just sitting here patiently, waiting for your call...” 

When October began, market sentiment was extremely bearish, with an abundance of “sell now” recommendations. In the past three weeks, the markets have taken off on a blistering rally, although it has been a choppy one with high volatility. So how will we know when the market has overshot to the upside, at least in the short term, if not the intermediate term? That’s easy, when the rally is about to exhaust itself, the pundits will be falling all over each with giddiness and buy recommendations, claiming they called the bottom on October 3^rd. The CNBC talking heads will be gasping for breath, hyperventilating, as they remark how the market has taken off and is now climbing a stairway to heaven. The ultimate signal that the rally is long in the tooth and about to end will come when the same prognosticator who expressed extreme bearishness at the bottom a few weeks ago, espouses euphoric sentiment, then claims he said to buy when he screamed “sell” at the lowest levels. 

I don’t think we are at the point yet where the market has become overbought enough short to intermediate term that a pullback is about to take place. The market was deeply oversold when October began, with the indices all about as far below their 100 and 200 day moving averages as they get, except for events like the 2008-2009 financial crisis. There is still some skepticism, we don’t have the giddy euphoric sentiment that accompanies overbought market conditions, but it is being built. From my perspective, there are several hundred points of Dow upside and several percentage points in the other indices before we will see that occur. Watch for CNBC to stick Elaine Gazarelli, Abbey Joseph Cohen, or someone else of that ilk on the screen to proclaim they are “constructive” on the market going forward. The sentiment will be extremely unbalanced. They don’t ring a bell at market tops, but they do make an overwhelming bullish call. 

Until then, I’m just sitting here patiently, waiting for your call....(double entendre intended).

For those who approach the market with a contrarian perspective, I believe this may be the safest time to buy stocks in more than two years. 

The same individuals that laughed 12 weeks ago, and 12 years ago, when I stated the market was overbought and ripe for a deep decline, have turned quite bearish in recent weeks. Bearish sentiment outweighs bullish sentiment by a fairly wide margin. 

The VIX has only risen above 50 once in the past 24 years, which was during the financial crisis in late 2008 & early 2009, when it stayed above 50 for several months. The VIX & VXN have both been crossing the 40 level from both directions for the past two months. Short term, the market is significantly oversold, and ripe for a bounce, which could be a sweet one for traders, as we could see a real October rising. 

A dozen years ago I told people how at the depths of a bear market, many previously adored market leaders sell for single-digit p/es. Look at many of the favored tech behemoths of the technology boom and where their p/es are now. 

There are many low to moderate risk stocks with solid fundamentals trading at historically low multiples, and they are in abundance in many sectors. Unless the economic environment deteriorates to level of the late 2008 crisis or the tech market collapse of 2000-2002, I believe we are in the vicinity of one of the best buying opportunities since the market started recovering in 2009. 

There are attractive valuation levels, contrary sentiment indicators, and some writers or bloggers I read that I consider contrary indicators. One, which labeled January 2008 the greatest buying in a generation, issued a conviction buy this July, then a sell signal yesterday. As I sit here writing this on October 3, 2011, I am watching the market get pounded. I have just closed out my last short or inversely correlated position. I am short nothing. I hold no inverse correlated ETFs. I do have ample cash available to buy equities that populate my shopping list. 

Longer term, many of the ingredients are coming into place for a secular bull market. After almost a dozen years of being hammered, investors are disenchanted, if not flat out disgusted in some cases, with the returns and experiences of the stock market. Valuations are low relative to bonds and fixed income. Sentiment is relatively bearish. Expectations for the future of the U.S. and world economy, and the associated performance of the stock market, are dismal. 

Furthermore, I believe the bear market that started circa 2000 and has run for more than a decade, is in its late innings, and a new secular bull market is on the horizon, although not quite here yet. I do not know if this secular bull will start a few weeks or a few years from now. My expectation in the late 90s was that this current secular bear market would last 12-18 years, I now expect it’s duration to be a on the lesser end of that scale. 

I have written many times comparing and contrasting the NASDAQ of the past couple decades with the Dow of the 1920s through the 1940s. When aligning those charts, with a “supercycle” of approximately 70 years, the present time would line up with 1941, when the markets were roiled by WWII and the on attack on Pearl Harbor, after which a secular U.S. bull market emerged in 1942, which took the Dow Jones index from below 100 in 1942 to 1000 in 1966, albeit with some intervening bear markets along the way. The bull market of the 1980s & 1990s lasted ~ 18 years, I anticipate the upcoming secular bull market will be of similar duration. I anticipate this bull market will resemble the 1940s and 1950s, except with the high volatility that accompanies this era, carrying the NASDAQ above 6000, if not much higher, in 20 - 25 years time. 

Yes, you are reading the correct blog, the same advisor who expressed so much bearishness during the past dozen years is forecasting better things on the horizon. In 1979, Business Week ran its infamous cover story on “The Death of Equities”, three years later the greatest bull market of the century began. The current environment, particularly the sentiment and frustration of stock investors, is similar to the atmosphere in the years shortly before that secular bull market emerged. Here’s to what the future brings, and hope tomorrow you find better things.