Sunday, December 7, 2008

10 contrarian reasons for a bottom

A couple of weeks ago I wrote about seeing constructive long-term sentiment readings. To expand on that post, I offer 10 contrarian reasons to be long-term bullish on the stock market. The first three I already mentioned from my previous post:

10 The buy-and-hold discipline is dead and market timing lives. Financial planners tell their clients to build an asset allocation plan and to stick with it - but there are numerous signs that individual investors are abandoning their buy-and-hold discipline. Barry Ritholtz pointed out that AAII data shows that individual investor stock allocations are at levels consistent with previous bear market lows. CNBC recently aired a segment on the Death of buy and hold as an investing discipline.

On the other hand, Mebane Faber's market timing system is shooting the lights out compared to a buy-and-hold strategy, with returns at all-time highs comparable to 1974 bear market low levels. These results are not surprising given the terrible environment for equities.

9 Stock prices are just plain beaten up. Bloomberg reports that “[t]he worst annual decline in the Standard & Poor's 500 Index since 1931 has dragged down every industry in the benchmark gauge and 96 percent of its stocks.” Bespoke recently reported that the spread of stocks from their 200 day moving average is consistent levels not seen since the Great Depression.

8 Speculation is dead. Trading volume on pink sheet stocks, the most speculative in the US market, are now moribund (see this Minyanville article).

7 NBER declares that the recession is here. As NBER will themselves admit, they would rather be right than timely. As experienced investors know, a good time to buy equities occur when NBER declares a recession because the market is forward looking and economic indicators are backward looking.

6 Mr. Market has gone through most of the stages of “grief”. Gillian Tett of the FT (see this worthwhile but rather long webcast) says that the market is finally near the “acceptance” stage of grief.

5 VIX and More reports that the TRIN Index is flashing a buy signal. While this contrarian indicator doesn’t pinpoint the exact bottom, it is an indication that sentiment is washed out.

4 A Chinese SWF refuses to invest in foreign financials. This is another sign that we are in the capitulation phase of the market. Does this sound like the head of a multi-billion dollar sovereign wealth fund or a shellshocked individual investor [emphasis mine]:
Lou Jiwei, chairman of China Investment, said the sovereign-wealth fund will not pour any money into foreign financial firms after losing billions on investments in Morgan Stanley and Blackstone Group. "I don't dare to invest in financial institutions now," Lou said. "The policies of the developed nations on these institutions are not clear. Until they are clear, I don't dare to invest in them. What if they go bust? I will lose everything."
3 The market doesn’t go down on bad news. Given the awful employment numbers out on Friday, don’t you find it surprising that the market opened up down but finished up on the day?

2 Nassim Taleb tries to out-bear Roubini. In this recent interview with Charlie Rose, Taleb states that “I think it’s worse than Roubini thinks”.

Drum roll please....

And the number 1 reason:

1 Nouriel Roubini is partying like a rock star and seems to have groupies. 'Nuff said.

A Santa Claus rally, setback and then the bottom
My inner investor tells me that I should be dollar-cost averaging into this market at these levels. While there may be some downside risk, equity prices should be quite a bit higher in a 3-5 year timeframe.

My inner trader tells me that with the positive market action on Friday in the face of the disappointing employment release, we are poised for the Santa Claus rally. Near term resistance on the S&P 500 is in the 900-920 area, with next resistance at about the 1,000 level. My expectation is that the market would then retreat and test the November lows before launching a new bull phase.

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