Market Bottom?

[Toro]

One of the reasons why I am bullish is because of this chart.

The first graph at the top is the S&P 500.

The second graph is the allocation by individuals towards stocks. Equities are currently at the lowest levels since data began being collected.

The third graph is the allocation by individuals towards cash. Cash is at the highest levels since data began being collected.

The bottom graph is consumer confidence. That is at an all-time low.

This does not mean the bottom is in. However, individual investors are usually a very good indicator of extreme sentiment which occur at turning points. In other words, at the top, individuals hold high levels of stocks and low levels of cash, and at bottoms they hold low levels of stocks and high levels of cash. We are currently at one of those times.

The following graph is of Tobin's Q. Tobin's Q is the ratio of market value to replacement value of a company's assets.

Tobin's Q is ~0.5, which is approaching multi-decade lows. As a reference, it hit 0.3 during the Depression.

Valuations are cheap relative to earnings.

Insiders have stopped selling their stock. They think their stocks are cheap too.

Returns for stock over the past decade have now plunged well below that of cash. Usually when that happens, stocks rise.

This does not mean the bottom is in, though the market has been taking a lot of body blows over the past two months and moving sideways instead of going down. There are still serious problems in the economy. However, if you have a long-term time horizon, stocks are attractive.

 

[Paulie]

In my opinion, a securities market bottom does not necessarily equate to an economy about to turn around. I'm deeply worried about the potential for high inflation due to all this creative accounting by the Fed this past year. A possible securities market bottom, coupled with all this creative accounting and the stimulus packages, may only mean we're about to start inflating another bubble, which is hardly good for the economy in the long run.

 

[usmbtech]

Toro, thanks for taking the time to share all of the charts and explain each one. It will be interesting over the next week to hear how bad the earnings actually are. I'm not ready to go all in but on these -300 through -400 days I'll be adding to positions.

 

[Toro]

Yeah, I don't know if we've seen the bottom yet. I'm working from the thesis that we rally then roll over again and re-test the lows. However, perhaps we are in the process of bottoming, I don't know.

What I do know is that stocks are cheap. My long-term model has stocks returning 12% per year over the next 20 years, the highest expected return since I put it together.