Stock Ideas 
Market Watch Do You Hate Stocks Enough to Buy?
Market Watch Do You Hate Stocks Enough to Buy? 
Market Watch
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In 2001, I identified precious metals as starting what I think will be a huge bull market. Today, in 2007, I think we have many more years for it to run. |
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| Do You Hate Stocks Enough to Buy? |
| Thursday, 29 November 2007 | ||||||||
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Dear Reader, Do you hate your portfolio right now? Does your neighbor? How about the analysts appearing in the financial media? Why am I asking if any of these people hate stocks? The answer to this question is often one of the most powerful catalysts for stocks. You just have to know what you’re looking for. Believe it or not, it’s easier than you think to tip Wall Street’s hand to favor your portfolio. This week, I decided to re-print a portion from one of my essays from earlier this year. Why? The market is at one of the most critical junctures of the year, as the threat of a bear market is looming larger than in the past. From a technical perspective, the S&P 500 index (SPX) is trying to break below its 20-month moving average, currently at 1,410. This is the technical line of demarcation between a bull and bear market.Fueling the weakness behind the potential move into bear territory are more fundamental breakdowns than the market has had to face in years. Inflation is colliding with a slowdown in growth (that’s called stagflation), there’s continued turmoil in arguably the most important sector (financials), the housing market continues to implode, and consumer strength remains in doubt. Despite these concerns, investors have yet to show fear or disgust towards stocks. Enter the re-print, which discusses the importance of fear as a signal that it’s time to go shopping for stocks. There are four stages to any rally, whether it’s in a stock, sector, or the market. A rally starts with the first stage - despair. That’s right, something as gloomy as despair kicks off a rally. We’ve all heard the term “the market climbs a wall of worry.” Well, the wall is tallest when there appears to be no light at the end of the tunnel. When investors have thrown in the towel. When you can almost hear a collective groan as investors look at a chart. This is “Stage One Despair.” Why does this mark the point at which a rally will kick in? Well, if investors hate stocks, it’s likely that they’ve sold them. Most are familiar with the term “oversold,” or a point where a stock is technically due for a bounce. The same theory applies to investor behavior. When despair has reached a climactic level, it signals that investors have likely exhausted all of their potential selling pressure. This means that the risk/reward balance has shifted away from risk, as there are fewer participants left to sell. Put simply, just as you can get the best seats in a theater when it’s empty, you can find the best deals on stocks when investors have left the market due to their despair. We gauge whether despair has set in by monitoring sentiment indicators such as investor polls, options activity, analyst recommendations, short interest, and media buzz, among others.
Right now, pessimism is not at the climactic levels we’ve seen at past market bottom. Specifically, most indicators are not as negative as what we saw at the August bottom. We talk about one indicator – the CBOE Volatility Index (VIX) – in today’s Market Watch below. Monitoring the Street’s behavior toward stocks will provide you with what is likely to be the best buying signal you’ll see in the next six months. It’s not quite there yet. So you’ll just have to be patient. Have a great trading week. CJ P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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