Signup for our free newsletter:

The Stock Market Bottom

Written By Brian Hicks

Posted December 18, 2008


That’s what I was thinking on the morning of October 10th. After falling nearly 20% in just seven days, the markets were at it again. For the seventh straight session, the markets were dropping like a stone.

But unlike most investors on that nasty morning, I wasn’t selling stocks. I was buying them.

That’s because, in my opinion, the markets weren’t just oversold, they were forecasting something else entirely. They were pricing in a depression that just wasn’t going to happen. To me that was kind of crazy.

Now, of course, I was well aware that there were problems—big problems. I had been writing about them for years.  I just didn’t believe they were big enough to bring back the ghost of Tom Joad.

A grinding recession? Absolutely. 

But apples and cardboard boxes to sell them in? Not a chance.

So instead of selling into the panic, we went long that morning, buying up blue chip stocks at a major discount.

Now, some three months of sleepless nights later, it is beginning to look like the October stock market bottom is finally going to hold.

That’s why now is the time to take another serious look at the markets, as we head into a year likely to be much better than the last.

6 Reasons to be Bullish in 2009

Here’s why.

I call them my six reasons to be bullish in 2009.  And while not one of them is enough to turn it all around individually, taken together they add up to a stock market bottom.

They are:

1. The Fed Is Now All In

If you’ve heard it once, you’ve heard it a thousand times by now: You can’t fight the Fed. And with the Fed’s latest policy statement released on Tuesday, it is now clear to the markets that Helicopter Ben has finally arrived.

On Tuesday, the Fed not only lowered rates to near zero but also stated that they would hold them there for basically as long as it takes. Moreover, the Fed also went out of the box by promising to use its balance sheet to become part of the market itself.

As a result, it is now quite apparent that the Fed will do whatever it takes to prop up the economy. The Fed hopes the end result will be increased borrowing to purchase higher-risk financial assets. This could restart the securities markets inside the United States as well as finance higher levels of consumer spending and business investment.

Will it work? That’s the $64,000 question. However, it is a net positive for the markets in the meantime.

2. The Obama Stimulus Package

Agree with it or not, a giant-sized stimulus package is just weeks away. With the change in administration, an economic recovery plan will likely be the first thing out of the box.

In fact, just this morning President-elect Barack Obama announced he is putting together the groundwork for a giant economic stimulus package, possibly as high as $850 billion over the next two years. In truth, it could end up over $1 trillion.

The President-elect is promoting a recovery plan that would feature spending on infrastructure projects, renewable energy, renovating schools, and technology spending.

There also could be some form of tax relief with tax cuts aimed at middle- and lower-income taxpayers, according to the Obama team.

The result is an economic money bomb that, when combined with the Fed’s actions, should be enough to kick start the economy in 2009. 

Of course, how it all plays out in the last two years of an Obama administration may be another story. But, for today at least, the future is now.


3. Mortgage Rates Are Falling

The Fed recently announced that it plans to buy up to $500 billion of mortgages guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, plus another $100 billion of the corporate debt of government agencies. This news has sent interest rates on 30-year mortgages tumbling.

In fact, as of today, the average 30-yr. fixed rate is a paltry 5.08%. That’s roughly where it was in June 2003, when the mortgage mess began. That will not only give families a chance to refinance but also help unlock the frozen credit markets.

And while it wouldn’t be enough to put a permanent floor under housing, it could be enough to generate a massive do-over in the mortgage world. To me, that would be a net positive (provided they managed to get it right this time).

That’s because as home owners everywhere — and I do mean everywhere — refinanced to lower rates, the number of good loans would go up while the number of bad loans would fall right off those troubled bank balance sheets. 

And after watching the yields on 10-yr. notes absolutely fall off the table in the last two weeks, the idea may not be as crazy as it sounds.

Here’s why…

Historically, 30-yr. mortgage rates have been priced about 175 basis points (bps) above 10-yr. note yields. But those spreads widened with the credit crisis to well over 200 bps. — keeping rates higher than normal.

However, those same spreads fell back to 175bps last week. That means now that 10-yr. yields have also fallen, Hank Paulson’s 4.5% mortgage rate is actually in range.

In fact, as of today, 10 yr. yields are a paltry 2.10%.  And if the Fed’s "quantitative" easing can keep them there or push them lower, a 4.5% rate could easily become a reality.

4. Volatility Is Becoming Less Volatile

For the VIX indicator it has been something of a banner year, as fear overran the markets. But as fearful as markets have been lately, the VIX is actually now in a downtrend, trading well below its 50-day moving average.

In fact, for the first time since Sept. 29, the VIX traded below 60 for all five trading sessions last week, ending up at 54.28. Today, it has fallen even further to a low of nearly 46.

That’s an early indicator that hedge funds and other investors have nearly finished liquidating their holdings for the year. The falling dollar is another, but that’s another story.

It also confirms an increasingly bullish sentiment toward equities. As the American Association of Individual Investors recently reported, bullish sentiment among respondents to its survey rose to a four-week high of 38% this week, up from 27% last week. Meanwhile, bearish sentiment fell to a five-week low of 40% this week, down from 48% last week.

That only underscores the recent uptrend, since both the S&P 500 and the Dow Jones industrial average have climbed 12 of last 18 trading sessions. And perhaps more significantly, the stock market has actually risen on days when the news has been awful.

That’s bullish.

5. The Recession Is Twelve Months Old

According to the National Bureau of Economic Research, the U.S. economy slipped into recession one year ago, which means we have been in the thick of it for 12 months now.

The bigger question now is how long it will last.

To some extent, it pays to look at the historical record. History doesn’t repeat itself, but it does tend to rhyme.

Here is a look at the durations of fourteen previous recessions, all of which we survived.  They are:

  • 1926-27….13 months
  • 1929-33 ….43 months
  • 1937-38… 13 months
  • 1945………8 months
  • 1948-49….11 months
  • 1953-54….10 months
  • 1957-58….8 months
  • 1960-61…10 months
  • 1970……..11 months
  • 1973-75…16 months
  • 1980………6 months
  • 1981-82….16 months
  • 1990-91….8 months
  • 2001………8 months

As you can see, there have been many of them, and that is a lesson in and of itself.  As bad as it may feel, recessions do happen. The good news is that the world doesn’t come to an end, and neither do the markets.

Moreover, the median length of a recession has been 11 months. From a historical perspective that means we are likely getting closer to the end. And if we assume that this one will go as long as 24 months, now is actually the time when you would begin to see the signs of a stock market recovery.

And finally…..

6. Stocks Are Cheap

Believe it or not, this one is true. Unfortunately, it took a 40%+ drop in the broader markets to get there. That’s because the earning projections for 2009 were completely out of line with reality, since those figures were over $100.  

The question now, though, is how far they will actually fall. My guess is to $60 a share, which could end up being conservative. If that is true that puts the markets completely in line with their historical averages.

In fact, for the S&P 500, the average price per $1 dollar of earnings paid at market bottoms has been 13.8 times since 1957. That means when you take that 13.8 and multiply it by $60, you get a value of 828 for the S&P 500. That is above the 752-point low we hit on November 20th.

That makes stocks relatively cheap as we head into the new year.

So as I’ve been discussing now for weeks, it’s actually time to buy stocks these days—not sell them. After all, the stock market bottoms long before the overall economy does.

And if you don’t have the stomach for it, I completely understand. However, if you can see the day that all of this turmoil ends, now is the time take Wayne Gretzky’s advice…

"Skate to where the puck is going to be," he said, "not to where it has been."

Here’s betting that it is much higher from here.

Your bargain hunting analyst,

 steve sig

Steve Christ, Investment Director

The Wealth Advisory

PS. To start off your New Year on the right foot, simply follow this link to join the fast-growing Wealth Advisory community today for as little as $79. To date, the Wealth Advisory is sitting on net gains of 286% on its closed postions. Not bad for a bear market.