February 26th, 2009

Is this a good time to start buying stocks?

A reader asked a question that many are asking these days: “Is this a good time to start buying stocks from either a technical or fundamental (or both) point of view?” I thought I’d share my response with you:

Not quite yet. Right now I’m still about 85% in money markets; the balance is mostly in precious metals, oil and some of the Treasury bond etf’s. I think, though, that we’re very close to the bottom and are in a base building process. My mouth waters when I see stocks like GE at 9.00 but, whenever I’ve curbed my anxiety and bought something, I later chicken out and sell at a loss (like I did with some of the steels).

I don’t know if you saw the following chart before; the original was in my October 11, 2007 post and is updated here:
It’s the monthly S&P since 1939 with a regression line up the middle (sloping up 7.5%/yr). All the S&P’s ups and downs can be enclosed within a band +/- 44%. The market is currently at the bottom band, the same as it was between 1974-83. We’ve become accustomed to daily moves of 2% or more over the past year so 7.5%/year doesn’t sound like a lot.

There is supposedly a lot of money on the sidelines so when the market does start moving up, it could be a very strong, but short, bounce. Even so, if history is any guide, we shouldn’t expect the market (S&P 500) to go much above 1100 for the next couple of years; that’s 30% above today’s level.

Remember, it took 5 years for the market to recover from the Tech Bubble Crash of 2000-2002 to its all-time high in 2007. The same could be true this time around. Let’s hope we all live to see the day when the S&P 500 finally bursts above the 2000-2007 peaks sometime in 2013-2015.

Fundamental view? I just can’t say anything about that. It’s too complex to figure out and the market today is too driven by emotions anyway for fundamentals to be reliable in any sort of meaningful way. There are many company’s out there that are going to survive and thrive, it’s just that we don’t know who they are and how far out it might be before we can buy them.

I’ve been thinking about how to make superior returns when the market might be expected to appreciate by no more than an average of 7.5%/year and have concluded that superior stock selection will become very important. In the past, we could have counted on the “rising tide lifts all boats” principle. Over the next several years, it will be important to select momentum-driven stocks in order to generate returns that beat the Index and make an above average return.

Which stocks will be the first to move (in terms of risk/reward) as this market reverses and slowly starts gaining some ground? I’ve concluded that one place to look will be among stocks that have displayed “Golden Crosses” in their price movement first (first wrote about this indicator on October 17, 2008; all the posts can be found by using the Google search the site at the right). A Golden Cross is where the price is above the 90-day moving average which is above the 180-day moving average. Only about 90 stocks (out of about 5000) now meet this criteria. As a matter of fact, many stocks in IBD’s list of the top 100 stocks meet the criteria.

It’ll be safer to jump back in when that list grows to about 200-250 and we’ll know which ones then have upside momentum.”

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