The New Bull market - Step 1 in place?

from the Stock Traders Almanac
www.stocktradersalmanac.com
Start Looking for a Serious Buying Opportunity
7/3/2008

It has by our reckoning, officially begun. The first key element necessary for the next major bull market is in place. It has nothing to do with the dollar, P/Es, market internals or any measurable metric; though many are negative. It has to do with the way things “feel” on Wall Street as well as Main Street. The talking heads have shifted their bias from Mister Rogers’ eternal optimism to Chicken Little’s the sky is falling. Financial newspapers and business sections have started featuring “how to survive a bear market” pieces on their front pages. Even casual observers of the tape have begun to opine about the nascent bear market they heard about on the local news. Slow to change their tune, but intractable once they do, the media is now in the bear camp. They have confirmed what most savvy investors have known for quite some time, the economy stinks and we have been in a bear market since October 2007. For investors who have spent the past year or so either on the sidelines or not fully invested this is a positive development. Once the main stream starts to worry about the market, we start looking for an entry point. Negative public sentiment is now in control. Sentiment gauges such as CBOE’s Equity Put/Call Ratio and Volatility Indices have not reached extreme negative levels, but readings on the percent of Advisors Bullish and Bearish have.

Currently, there are 31.9% Advisors Bullish and 44.7% Bearish. Investors Intelligence’s Mike Burke reminds us that these readings are similar to the levels we reached back at the October 2002 bottom.The best buying opportunity won’t likely occur until later this summer or in the fall. It is obviously impossible to pick bear market bottoms. People who say that they pick an exact bottom (or top for that matter) are either lucky or lying.In order to spot the level which a bottom might be put in, there is a methodology that we have developed. Refer to the Proving Grounds in your June 2002 issue. In a nutshell, there are two primary scenarios; forced bottoms and natural bottoms. A “forced” bottom occurs when an extrinsic event forces a major sell off resulting in investor capitulation. The other type of bottom on Wall Street is the “natural” bottom. These bottoms occur when a weak economy runs its course, when stock prices get sufficiently cheap, when sentiment just can’t get any worse, or when all these things happen. In both instances volume is the key. We are not there yet, we have merely begun the bottoming process. It could take three weeks, three months or more. The point is that now is the time to start figuring out what to jump on when the time is right. Generally the sectors that have been brutalized the most during the market downturn is a good place to start. Financials and Real Estate are currently at the top of that list. Contrarian investing is tricky. To succeed you need to trust yourself and filter out the noise. It is an election year so there will be no shortage of public outcry about the state of the markets. It is going to get worse before it gets better. When it can’t get any worse, it will. When the recovery is nowhere in sight, it has probably already begun. When everyone is asking if they should sell, it is probably time to buy. Happy Birthday America! Have a safe and enjoyable holiday.

Jeffrey A. Hirsch, Editor
J. Taylor Brown, Director of Research

This article is entirely accurate but in my humble opinion about 8-12 months too early. We still have a ways to go in this bear market. The average joe is pessimistic because this is a consumer led recession. Joe knows and has known for a while that things are bad. The market is only confirming what Joe has known. To expect that the market will overcome the dual forces of inflation and consumer slowdown (aka stagflation) in the near term or mid term future is being premature. I agree that at some point this will end and some amazing buying opportunities will exist. We're just not there yet. We've had just ONE bear market rally so far. There will be atleast 3 or 4 such false rallies which will exhaust all bullish sentiment. And when everything seems darkest.... Mr. Hirsch and Mr. Brown - you do great work with your research. Your semi-monthly bulletins are eaglerly awaited. Thank you.