19 new highs, 462 new lows on the NYSE. We are in a bear market, and have been for months. From here until whenever it turns (it could be two days, it could be two years), we must monitor two things as value investors and bottom fishers:
1) Reliable quality companies selling at obscenely cheap valuations. Several are there now. New Holland is one we all know too well. But we have already seen the danger of buying these secondary companies at cheap valuations before the industry leaders have taken their pain. The S&P is still only down 10% from its peak. That's amazing to me considering how much carnage there is across the market. Most of the quality companies I look at are down 20-50% from their peaks. So we should probably resist the temptation to buy until the market (i.e. the indices) have done their thing. If you look at the GEs or the Dells or the Microsofts, they have barely begun to drop.
2) A bottom. This is worse than anything we have seen in the last two or three years. The kneejerk "buy the dips" crowd can't have much buying power (i.e. cash) left, though they still have plenty of sanctimony. At some point these guys are going to get scared. They are still very complacent. The pundits on TV and the individual investors I talk to and Abby Joseph Cohen are saying this too will pass. Maybe two or three months of dead money, but if you're patient, then you'll be rewarded with new highs by the end of the year. How about the possibility of a further 30% drop, virtual panic, and not being whole for 5-10 years? When people start realizing how likely that scenario is, you are going to see panic selling by the retail investors who we all depend on to prop up the market by buying at idiotic valuations. They are not ready to sell yet, but this dynamic is what will take the "correction" from 20% to 40%. We have not seen that panic sell (in the industry, we call it "the puke stage"). When I see signs of that I'll think about putting my cash to work tentatively.
Or maybe this is just the frustrating (to us bears) 10% correction we have seen before. That would make this the bottom. But I don't think so, because the fundamentals (except for interest rates) have deteriorated since those past corrections and the valuations may be even higher. If the market bounces from here to new highs, I may just consider selling everything and joining the priesthood. I guess if I'm married I can't do that, so I'll just have to come back and fight another day.
Jim |
