Bear Market May Be Investor Opportunity
By Pierre Belec
NEW YORK (Reuters) - The best time to buy stocks is when everyone is incredibly bearish. Right now, with the media screaming about the market tanking and Wall Street gurus throwing in the towel, is it smart to go with the herd?
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History shows that the stock market often fools everyone. When the majority of people are bearish, stocks turn around.
``With the intense pessimism and the wholesale bailing out by the 'Market Strategists' of the world, I believe the odds are high that the market low has already been reached,'' says Don Hays, president of Hays Advisory Group, an investment consulting firm.
In fact, Hays says he hasn't been this bullish about the market since the middle of 1996, which was the period just before stocks started rocketing to the moon with double-digit annual gains. It was one of the most spectacular times ever for Wall Street that came to a bloody end in March 2000.
What has changed Hays' views is groupthink, i.e. too many people are thinking the same way.
One of the neatest measures of the Street's pulse is the Arms Index, a 10-day moving average for the New York Stock Exchange Composite of all stocks listed on the Big Board. Devised by technical analyst Richard Arms Jr, the index tracks buy and sell orders to gauge the level of pessimism or optimism in the market.
Lately, the index has been giving one of its rare buy signals -- only the eighth signal in its 34-year history, said Hays. The volume of sell orders in declining stocks has been unusually high, which is saying there's intense pessimism among investors, which may presage a market bottom.
Hays says the index's strongest feature is its ability to pick market bottoms. But it can also pick market tops, as it did at the start of the market's crash in March 2000.
``The index has a phenomenal record, and it's batting a thousand,'' says Arms.
When the index is 1.00, the market is in harmony and buy and sell orders are matching up evenly. When the index falls well below 1.00 it says investors are overly bullish. When it rises well above 1.00 it indicates a lot of volume on the sell side of the market and that bearish investors have gone overboard.
Now, the index is at 1.50, and Arms says that whenever it's gone to the level in the past, the market has rallied for months or years, producing gains of 50 percent or more in most case.
``The Arms NYSE index is saying that we are likely to have a good move,'' says Arms from his office in Albuquerque, New Mexico.
Wall Streeters who track the index say there is often a lag between the time the index flags a low and the market rallies. It can still take a month for the market to make its turnaround.
Currently, there's massive pessimism. Stocks tumbled to four-month lows a week ago, despite good news the Federal Reserve had chopped interest rates for a seventh time this year in a desperate bid to get the economy back on track and boost corporate earnings.
Then, there are those famous surveys that say optimistic investors are hard to find. One sampling found that optimism was at a record low in August as investors continued to worry about the economy, according to the Index of Investor Optimism, a joint project by UBS PaineWebber Inc. and the Gallup Organization.
``Recent negative economic news and ongoing market volatility continue to affect the optimism of investors,'' says Mary C. Farrell, UBS PaineWebber senior investment strategist.
``However, for those with a long-term outlook, there are reasons to be optimistic,'' she says. ``The easing of interest rates by the Federal Reserve as well as improved earnings visibility, should provide attractive opportunities for investors with buy-and-hold strategies.''
Hays' bet: The Dow 12,600, exceeding its Jan. 14, 2000, high of 11,722 over the next six months, and 2,800 for the Nasdaq in 12 months, which would still put that index well below its record high of 5,048.
How do you tell when the end of the bear market has finally arrived? Bill Valentine, president of Valentine Ventures LLC, says the market's recovery is usually the first leg of the next bull market.
``The recovery is characterized by a lot of market plodding around and a few critical, sharp bursts upward,'' he says.
And timing this market can be very tricky. During the last bear market, stocks bottomed out in October 1990 then plodded around for three months followed by an 18 percent jump in 20 days.
``Not only do you have to be fully invested to benefit from these important few days, but if your goal is to recover your lost asset value as quickly as possible, you have to be aggressive, albeit diversified,'' he says.
Moreover, Arms says, the index doesn't point to any near-term recovery in battered tech stocks. That sector still needs to do more ``base building'' before it can launch a recovery. Value stocks with good earnings prospects will lead in the recovery.
For the week, the Dow Jones industrial average plunged 474 points to 9,949. The Nasdaq composite index sank 111 to 1,805 and the Standard & Poor's 500 index slumped 51 to 1,133. |
