Tuesday, August 23, 2011

Reasons to be bullish

1.  Stocks are cheap!  Stocks forward earnings yield relative to treasuries are at levels not seen since 2009.  Would you rather loan the government money at 3.7 pct over 30 years or buy a defensive dividend paying stock like JNJ where you get a chance for some capital appreciation along with the dividend.  Also, stocks current PE ratio is the cheapest since the market bottomed in March of 2009!

2.  Insiders are buying like crazy.  Company insiders are buying stocks at the fastest rate since March of 2009.  Insiders have the best knowledge of their companies prospects so there is only one reason they would be buying and that is because they think they will make money.  Understand this is not a short term call on the market as insiders are forced to hold stocks for 6 months after they purchased them.

3.  Dumb money indicators are bullish.
As you can see from the chart, when the "dumb money" turns bearish it can signal a turn in the market.   Dumb money is usually bullish at the top and bearish on the bottom so they can be useful as contrarian indicators.  Mutual fund investors are traditionally considered to be "dumb money" and they are pulling their money out of the market at the fastest rate since 2008.  I consider myself to be "dumb money" as well and witness that I turned bearish a few days back and we are up 200 today!

4.  Copper and oil are not crashing.  Of course this could be related to the weakness in the US Dollar but if the global economy was truly falling off a cliff, copper and oil would be crashing.  Brent crude is still above $100 and copper has held its 2011 and early August lows.  As they say Dr. Copper has a PHD in economics.  You can infer a lot about the prospects for  global growth going forward by looking at the price of copper.

5.  Italian and Spanish bond rates continue to decline.  Since the ECB pledged to buy Italian and Spanish bonds the market has stabilized.  One of the major fears of this market is whether Spain and Italy were going to go the way of Greece.  With the ECB stepping in one major market fear is alleviated.

I would say that the most important indicator is copper and oil prices.   The world economy continues to grow as evidenced by oil and copper not falling off a cliff.  As long as this continues stocks are not going to collapse.  While there are still downside risks to this market, at these levels markets have priced in a lot of bad news.  If you are a young accumulator investor, now might be the time to start buying in.  

4 comments:

  1. Seems like the economy of the world is getting worse and worse

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  2. I am enjoying your blog. We tend have some different ideas, but this is a good thing. You are a lot more verbose than I am. I think I may learn some things.

    ReplyDelete