12 Signs We’ve Bottomed in the Stock Market
By LC on Apr 3, 2008 in Commercial Real Estate, EGO Investment Club
If you don’t think real estate is coupled to the economy and the stock market, then please rethink that assumption!
Not only to we look to the larger chain retailers and restaurants for guidance, the market tells us much about consumer behavior and the propensity to spend.
From RealMoney.com, a subscription site, by permission of the author
The Disciplined Investor: 12 Signs That We’ve Bottomed
By Gary Dvorchak
RealMoney Contributor
4/3/2008 1:53 PM EDT
Click here for more stories by Gary Dvorchak My partner, Chris Bertelsen, recently penned a powerful rationale for why we’ve seen the worst of this bear market. He has graciously allowed me to borrow liberally from his work. Here are 12 reasons why we may have seen the lows for this year:
- 1. Technicals recently showed that we had a 3%-plus rally in the S&P 500, along with 90% of stocks advancing and 90% of stock volume to the upside. According to Merrill Lynch, the only other times in the last 28 years that happened were in August 1982 and October 1987. Furthermore, the number of new lows is contracting meaningfully.2. Sentiment is just “Gawd-awful.” AAII (i.e., individual investors) measured the most bears ever at 59%. The put/call ratio touched an all-time high, and “da bears” have been loading the boat with puts. All this is truly tipping the nitro can for a significant rally. This past Sunday, CNBC changed its schedule to cover the 1,000-point drop in the Hang Seng Index and the collapse of the U.S. market futures, working everyone up to … an up day on Monday. After an exhausting nine months, there is too much anticipation of bad news.3. Bear Stearns (BSC - commentary - Cramer’s Take) is our “inflection point” crisis, similar to Orange County in 1994 and Long Term Capital Management in 1998.
4. We are in bear market territory, being 18% to 20% off the highs (depending on the index you use). The average bear market decline is in the 20% to 30% range, so we’ve already digested most of the medicine.
5. Ford Investor Services’ dividend discount model shows equities to be as cheap as they were in the early 1980s.
6. Forward P/E multiples are low, according to Smith Barney, well below the levels of the last 15 years.
7. The Fed, Treasury, Congress and ECB are now engaged, and it is very difficult to make money fighting the Fed.
8. Interestingly, equities like inflation, and inflation is here and working its way through the economy.
9. Dividend payouts are growing at almost twice the pace of the 1990s. Dividends matter! They account for about 45% of long-term equity returns. Buybacks have not faltered during this market swoon either.
10. Although the financials are fighting a debt problem, corporate America’s debt levels are the lowest since the 1960s. Corporate balance sheets are strong, and most companies can readily survive a mild recession.
11. The No. 1 reason for long-term bullishness is the “capitalism train.” With 3 billion new consumers poised to participate in the global economy, an awesome force for growth lurks right beyond our shores. The market will discount near-term financial system issues, but it will also soon discount a return to robust global growth over time.
12. The S&P 500 has twice tested and bounced off the 1275 January lows. We may test it a third time, but the fact that it is holding amid the firestorm occurring in the credit markets means that one must ask, what worse than what we’ve already seen can happen to drive the S&P lower?
Now, I must make one caveat: Being at a bottom does not necessarily mean that a rally is imminent! In fact, I believe we could tread water for quite some time as problems in the real economy are fixed, so being “past the bottom” is not necessarily a reason to pour into stocks. Better to pick your points, look at individual names with exceptional situations — such as Research In Motion (RIMM - commentary - Cramer’s Take) — and scale in over time.
Gary T. Dvorchak, CFA, is a managing partner at Aviance Capital Management, a Sarasota, Fla.-based institutional investment manager. Gary is the portfolio manager of the Landmark Capital Disciplined Growth Fund, ticker LCDGX. The portfolio is posted on Stockpickr.com under Aviance Disciplined Growth in the Professional Portfolios section. Gary’s column, The Disciplined Investor, appears weekly on RealMoney
