5 Reasons to Invest in the Stock Market
Time to Slaughter the Herd
I've had it up to here and I'm not going to take it anymore. The doom-and-gloom crowd has been bashing this market and economy for more than three years now. They are just as loud today as there were in 2008 — and yet 2009 will go down in the record books as one of the best years ever.
Many sectors were on fire: nonferrous metals were up 160%, the much maligned coal sector was up 129.1%, and precious metals were up 100%.
Heck, I recommended four triple-digit junior miners alone!
In the past month and a half, I've recommended one Mongolian oil stock that is up 67% and climbing, and another biotech that jumped more than 250%.
Smart investors don't ask me what they should stay away from... They ask me where they can find the most money, which sectors will give them the highest alpha.
Today, I'm giving my readers five reasons to be bullish...
Wall of Whining
The truth is that the market climbs a wall of worry. The more haters there are out there, the greater the possibility that the market will go up. And right now, economists and other market-watchers are griping about sovereign debt, housing, and unemployment, among other ills...
At the end of the day, economists are wrong more often than they are right. That's why they call it the dismal science. Stock markets are a psychological beast, not an academic exercise.
That's why I love rampant pessimism. It provides fantastic buying opportunities for those who know where to look.
So, in the spirit of American optimism, I give you five reasons to be bullish:
1. Insiders are buying.
According to those who track insider buying activity, when corporate insiders buy, the market goes up; when they sell, it goes down. This makes sense. Think about it: Who knows more about a company than those who are running it?
Corporate bigwigs like CEOs and CFOs — as well as those that own more than 10% of a company's shares — must file buys and sells with the Security and Exchange Commission. And these players are pretty good at calling the bottom.
Data compiled by Insiderscore.com shows "Insider buying at companies in the small-cap Russell 2000 index (RUT) was at its strongest in the seven-day period ending Feb. 9 since the end of March 2009, shortly after markets hit a 12-year low."
Furthermore, "Corporate executives sold stock for much of last year as the S&P 500 index (SPX) rallied more than 67 percent from its lows. But now, with the Russell 2000 falling almost 10 percent in three weeks since hitting a 15-month closing high on Jan. 19, insiders at smaller companies are scooping up shares."
History has proven that small cap stocks tend to lead the market both into and out of bear markets. And the venerable Economist backs the data: "Buying in Russell 2000 companies is outstripping selling for only the third time since the end of the second quarter of last year."
2. Stimulus spending will arrive.
Forty percent of the now $862 billion package passed last year is set to be spent in 2010. Robert J. Barro over at the Wall Street Journal ran some numbers, and he believes that the additional government spending added 0.8% to GDP in 2009. You may remember that fourth quarter GDP growth came in at 5.7% — a fat number to be sure.
Mr. Barrio also believes that the spending will add 1.2% to GDP in 2010. I will grant you that the stimulus will be bad long term — as it takes power from the innovative private sector and gives it to the government — but over the short term, specifically 2010, it will be good for stocks.
One sector that will benefit is infrastructure. As much as the media hyped "shovel-ready" projects last year, we all know that the bureaucrats don't work that way. There are processes and impact studies that must be accomplished.
This year will be the year of big road and bridge projects. Add this to the pending Jobs for Main Street Act, and you will have a boom in bridges, roads, light-rail, Amtrak trains, and fuel-efficient vehicle for government fleets.
"Our research shows most of the funds have not left Washington, although they will in 2010. This year we are tracking 23,500 new projects in the pipeline, and there is $76 billion in stimulus funding that will reach contractors on these projects this year, creating 480,000 jobs in the construction industry. Indirect jobs lift the total to 900,000 in 2010," says Onvia, a contracting consultant.
The report goes on to say that the highway construction market will grow by 8%-10% in 2010. Companies like Caterpillar (NYSE: CAT), Granite Construction (NYSE: GVA), and Astec Industries (NASDAQ: ASTE) should benefit.
As an aside, you might want to wait a month or so, as all of these companies missed their earnings projections. Government spending always takes longer than you think. That said, there will be a buying opportunity as the cash flows in over the next three quarters.
3. It's all about the Benjamins.
Check out this chart showing all U.S. companies that reported earnings this season. For the third quarter in a row, 68 percent of companies beat earnings estimates. And revenue was up 70%. That's the highest rating since the forth quarter of 2004.
At the end of the day, stocks are driven by earnings. And we have them.
4. Bullish technicals.
As I stated above, the small caps tend to lead the market. As you can see from the chart, the tri-directional indicator is just starting to slant upward in a parallel. This is bullish. The MACD crossed over below the center line — again, a bullish signal. The Stochastics show we may sell off for a few days, but you can't have it all...
That said, all major, U.S. Indexes are above their 200-day moving average and are hitting higher lows, if not yet finding new highs. You can make the argument that the SP500 broke its short-term up-trend, but it also broke its three-year down-trend.
5. NY Fed model says no double dip.
Over the past two years, money had been sitting on the sidelines in bond funds. According to the Investment Company Institute, "U.S. equity funds suffered about $46 billion of outflows from August to December 2009 while bond funds took in about $198 billion."
This suggests that retail investors are playing it safe — a bullish indicator suggesting there is money ready to return to equities.
In fact the money in bonds has increased the spread between 10-year and 3-month T-bill to 3.67%, the highest since May of 2004.
NY Fed Model
The New York Federal Reserve uses this to forecast its "Probability of U.S. Recession Predicted by Treasury Spread."
The Fed's model "shows that the recession probability peaked during the October 2007 to April 2008 period at around 35%-40%, and has been declining since then in almost every month. For January 2010, the recession probability is only 0.82% (less than 1%) and by a year from now in January 2011 the recession probability is only .043%, the lowest reading in more than 26 years (since September 1983)."
A spread above 3% is consistent with economic recoveries, as proven in the last two recessions. As you can see by the chart below, there is zero chance of a double-dip recession in 2010 or 2011.*
*You can find their full data here.
The bottom line is that it's much easier to make a bearish argument than it is to make a bullish one. Human nature is such that it seeks to play things safe.
That said, every successful person I've ever met was an optimist. The time to buy is when pessimism it at its highest. The time to sell is when everyone is bullish.
Now is the time to buy.
Editor, Wealth Daily and Crisis & Opportunity
Investor's Note: Right now, the fastest growing economy in the world is Mongolia. They have $8 billion in untapped oil wealth alone. This is a country with a GDP of $5 billion last year. In additional to oil, the country has abundant gold, copper, uranium, rare earth metals, coal — and just about every other resource you can dig out of the ground.
It has been widely reported that Mongolia will double GDP every year for the next five years. Not only that, but the country's stocks are severely undervalued. I've found one oil company that is up 67% in the past five weeks and would have to rise by 44 times to be fairly valued in terms of its reserves. I encourage you to read this free report now — before it's too late for investors to capitalize on massive profits from this hidden gem.