SOME REASONS FOR A BEAR MARKET RALLY

Written Friday, October 17th, 2008:  6:30 am

1.        Obviously, IBD says we’ve set up properly for a rally as I spelled out above.  Schwartz View:  Diluting the strength of yesterday’s bullish follow-through day in the Dow Industrials and S&P 500 was the fact the Nasdaq Composite, S&P 400 Midcap and S&P 600 Smallcap all went to new bear market lows on Wednesday, which means that even after yesterday’s big up day, they haven’t posted bullish follow-through days..  Still a rally has to start someplace.  What we don’t want to see next is new closing lows which would negate yesterday’s buy signal.

2.        Warren Buffett, the best value investor alive, was in buying stocks below Dow 8500 yesterday and says in a New York Times article that he’s following his rule:  “Be fearful when others are greedy, and be greedy when others are fearful.”  CNBC says this morning Mr. Buffett did stop buying when stocks took off upward yesterday afternoon.  Schwartz View:  I’m a little skeptical of just why the Oracle of Omaha wrote to the Times.  He does have lots of skin in the game after buying Goldman Sachs and other stocks recently.  He sure doesn’t want fear to turn this economic downturn into a depression, right?  So he may be using his massive influence to suit his purposes.

3.        October has bottomed out numerous bear markets in the past, like the ones in 2002 and 1987 mentioned above.  I’d include the Papa Bear market of 1973-1974 in that category too, October being the bottom although stocks did retest that December.  Plus October ends the worst six month stretch of the year and leads into two of the best months for stocks, November and December.  Schwartz View:  Lots of stock sectors show rallies starting in October as well.

4.        Recent dramatically lower stock prices have brought back value into the stock market, both here in the US and elsewhere.  One reader pointed out General Electric to me yesterday and when I checked into GE, Bloomberg showed a price/earnings ratio of 10, the previous low PE being 16.  And then an article I read says the PE for one MSCI Asian gauge traded at 10 times, the lowest since at least 1995.  Even perma-bears at www.Comstockfunds.com wrote yesterday that:  “For the first time since wee start writing these comments in early 2000 the market has declined to levels where it’s reasonably valued on all five of our major parameters – not, cheap, mind you, but reasonable.”  Schwartz View:  Many value investors and others now are saying they’re finding “many” cheap stocks out there now.  Long term money mangers must be licking their chops.

5.        The US presidential election will soon be over.  Thank goodness!  The stock market hates uncertainty and thus we’ll likely get some uplift just because one uncertainty will be put to rest.  Schwartz View:  Plus normally, just like after marriages, we should experience some type of honeymoon period where everyone is relieved and feeling good.  Some coming together of the whole country at least for a short period after the November 4^th election.

6.        Governments everywhere have now come together (somewhat), realizing and admitting the seriousness of this global credit crisis and more importantly have rolled out their big guns to fight it.  We got the all-encompassing US rescue package, followed shortly thereafter by coordinated global interest rate cuts (unprecedented).  Then we had EUROPE showing some great leadership, and I must say unexpected togetherness, last weekend saying all countries would do everything possible to support their banks and the overall global financial system.  England came up with a plan to inject money directly into banks which was widely applauded and which the US and others countries said they’d quickly follow.  Schwartz View:  Immediately upon first hearing that the US was proposing an all-encompassing, system wide bailout plan to tackle this persistent global credit crisis, forgoing their previous piecemeal approach of tackling each problematic company one at a time as they arose, I felt it had a good chance of working.  Then, getting there from here got all bollixed up by the US Congress.  But now we’ve past that turmoil, I’m back to thinking these refined, now even larger global wide plans have a good chance of succeeding.  And inspire enough, even tepid, confidence by big investors that they will start buying stocks.

7.        Short term credit markets -- namely LIBOR, the rate banks charge each other for short term loans -- are freely up some, so say the experts.  The average investor has to take the expert’s word for this one since there’s nothing easily tracked but I see Rick Santoli, CNBC’s bond expert, is saying the same thing, he sees signs of credit easing.  Schwartz View:  Easing of credit markets is and has long been priority #1 for, central banks, investors, everyone, in ending this credit crisis.  If money indeed starts flowing again, risk of the ultimate nightmare scenario, businesses everywhere and in all sectors shutting down from lack of credit, will lift and then confidence would start coming back, exactly what we need.

8.        Finally, we’ve just gone through a major bout of days upon days of capitulation, of panic selling, which I’d say can be laid at the feet of the economy, the admittance that its getting worse and we’re in recession now and heading deeper down.  Not because, as some say, polls showing Senator Obama is likely to win the presidency in 2 ½ weeks caused the selling,.  But because it’s just became painfully obvious during the wrangling in Congress over the US government’s proposed bailout bill that the economy was starting to tank and nothing could really stop that.  Schwartz View:  Whatever the cause of the recent dramatic plunge, the fact is rallies can easily, and many times do, begin when sellers exhaust themselves.

9.        Oil is way down as are other commodities, taking big pressure off consumers, businesses, everyone.  Schwartz View:  If commodities stay down, that will help a lot.

10.     Hedge funds, a large influence in today’s stock market, got margin calls because of their securitized investments which they can’t sell so they had to sell something, stocks, bonds, oil, gold, etc..  Another old Wall Street adage in play:  “Sell what you can when you can’t sell what you want.”  Schwartz View:  Hedge funds are also getting quarterly redemptions too so they have to sell to prepare.  Net, net, we ended up with this extended selling panic.

SCHWARTZ SUMMING UP.  The above is a whole list of reasons, you could probably add a couple more, why the stock market should rally soon.  Thus I’m going to search today for which sectors and stocks look primed to rally.  While I believe any rally here won’t last more than the normal three months maximum of any intermediate term bear market rally, it sure would be good to get some relief from the downside.  I think this bear market lasts at least two years but stock prices, after recently plummeting, are now way ahead of themselves in their normal, historical decline of about  -2% a month during extended bear markets.  We’re one year in and down -36% on the Dow, meaning we’ve lost on average, about -3% a month.  So we have lots o time for a rally.  Plus, psychologically, investors have just given up the ship on the economy, and we all know human beings overdo things, good or bad.  So we’re due and hopefully all primed for a rally.  Now, if only big investors who drive stocks will figure the same as I and start buying. 

For traders and speculators only, I would once more put your toe and then one foot back in the water.  Step by step get more invested for trading purposes.  Rallies don’t come along often in bear markets so when one is due, go for it.  One Schwartz Rule is to:  “Move Early!” so I plan to do so and see what I can buy for trading purposes in coming days.  As long as stocks don’t make new lows.  Good trading!