Stocks have become severely oversold.
The stock market is acting as if we are already in a recession. The dividend yields on many major corporations are back up over four percent…in an environment where the 10-year U.S. Treasury is yielding 1.9%.
The stock market is saying that it believes companies will cut their dividends. The bond market is saying that we are headed for years of no economic growth.
I believe there is an overreaction to the situation. As I have been saying for the past few days, stock prices have fallen too fast, too quickly. I believe that stock prices will bounce higher from their current oversold levels. Here are four reasons why stocks will bounce:
First, the number of bearish stock advisors sits at its highest level since March of 2009. When you have so many stock advisors bearish on the stock market, the market usually does the opposite and marches on higher. We all know stocks went up 100% after March 2009.
According to data compiled by Bloomberg, the S&P 500 is trading at 10.2 times forecast 2012 earnings. The S&P 500 today is valued less than in any other recession since 1957. Coupled with dividends, I see the value in stocks, even if earnings are cut. What is the alternative? Real estate just keeps declining in value…the10-year U.S. Treasuries pay less than two percent!
The Chicago Board Options Exchange Volatility Index, also known as the VIX, sits at 40 today. This has happened only three percent of the time in the past 20 years and, each time the VIX has hit 40, the stock market has rebounded.
Finally, for the quarter ended September 30, 2011, the stock market put in its worst quarterly performance since the quarter ended March 31, 2009. We all know what happened after March 2009. Stocks climbed 100%.
Let me perfectly clear. I still believe we are in a long-term secular bear market for stocks, which started in December of 2007. But right now, at this immediate time, I believe that stocks have fallen too quickly and are due for a big bounce from their oversold levels.
Michael’s Personal Notes:
I’m not sure how many of my readers take me seriously when I say that the citizen protests and riots, like many European countries have experienced this year, are headed to America. They are already here and getting larger.
Three thousand people converged on a Bank of America (NYSE/BAC) building in Boston on September 30, 2011, to demonstrate against the bank’s foreclosure practices. Twenty-one people were arrested.
In mid-September, the Occupy Wall Street rally was organized in New York to protest against the financial disparity between large U.S. corporations and citizens and the government’s beneficial treatment of financial companies during the credit crisis, choosing to prop them up with $700 billion in taxpayer money. At one point, this group’s march in New York was estimated at 10,000 people strong.
Frankly, I’m surprised it has taken this long to get these protests organized and underway here in America. And I believe that the marches, protests and possible riots will only get more frequent and larger.
Where the Market Stands; Where it’s Headed:
I’ve been writing over the past few days that the stock market has become severely oversold. Well, the bounce-back is underway. Over the past two days, the Dow Jones Industrial Average has added about 300 points. With so many investors, analysts and stock advisors, I expect the stock market to continue riding the wall of worry higher. I wouldn’t be surprised to see stocks continue rising during the remainder of 2011.
The bear market rally in stocks that started in March of 2009, although long in the tooth, is alive and well,
What He Said:
“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.