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The Decade's Most Irresistible Opportunity... Don't HesitateBy
Friday, July 18, 2008
On Wednesday I bought a variety of stocks... I'd been trying to restrain myself. Just about everything has been in a downtrend this year. But things are just too irresistible now. If you're a longtime reader, you know my criteria for buying... The ideal situation is when you can get all three of these together: 1) cheap, 2) hated, and 3) in the beginning of an uptrend. Right now, the first two of our criteria are at "best in a decade" levels. So, though it feels extremely risky out there now, it's probably the least risky time to buy stocks in the last decade. Let me show you... Just recently, the "Investors Intelligence" poll found that professional investors are more bearish than they've been at any time in the last decade. As the chart below shows, whenever investors get really bearish, stocks are generally near a short-term bottom.
I put a vertical line in whenever investor sentiment reached a bearish extreme. In hindsight, it always turned out to be good for a short-term rally in stocks. In bear markets, those rallies are short. In bull markets, the rallies are strong.
So judging by the Investors Intelligence poll, we have one of our three criteria: Stocks are "hated" right now. Stocks also meet our "cheap" criteria... Stocks are cheaper now than they've been in more than a decade. According to Bloomberg, the forward price-to-earnings ratio for the Dow is only 12, and it's only 13 and change for the S&P 500 index. The one criterion we're missing, of course, is the uptrend. No sector in the U.S. is up over the last 12 months, except a few oil stocks. It's been a horrible grind... until Wednesday of this week. Tuesday felt like "capitulation" to me – investors finally threw in the towel. Wednesday's rally confirmed it. That we held on to those gains on Thursday morning was further confirmation. When it feels safest to buy – when everyone else is talking about it – it's often the most risky. In 2005, all the talk was how "you couldn't go wrong" in real estate. In 1999, it was stocks. Now it feels like "you can't go right" investing in stocks – which is usually when it's least risky. Sounds convoluted, but it's usually true.
If it happens, don't hesitate. Buy. Good investing, Steve
Further Reading:
The One Positive Thing About This Bear Market Market NotesA POTENTIAL 500% BIOTECH RALLY IS AROUND THE CORNER More on the "acting well" biotechnology sector... As we've covered before, the biotech sector is a speculator's best friend. The investing public just loves a potential cure for cancer. So biotech bull markets are spectacular... often returning 300%-500%. A small stake in a biotech rally will make your entire year. A large stake will make your retirement. We could be at the start of one of those great biotech bull markets. Several weeks ago, we ran a chart of the PowerShares Biotech ETF (PBE). While the broad market crashed in May and June, the PBE held like a rock. Today's chart is another sign that a biotech bull market may be around the corner. It's the past year in the S&P Biotech Index ETF (XBI). This fund is full of midsized biotech companies with actual sales... sales a weak economy won't wreck. |
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