This is a continuation of the Momentum Rider Investment Series on Ten Major Reasons Investors Should Be Buying Stocks Right Now.
Reason #6: The best time for investors to be putting their money to work is during a period of fear and uncertainty in the masses. Many great investors have been quoted on this principle including Warren Buffett in the last few years. However, the minor improvement MR would add to this principle is that the money should only be allocated after there is a reasonable probability of a recovery. That time is right now.
During the majority of the period from the 3rd quarter of 2009 until just recently, there were a large number of strategists and economists that were predicting a reasonably high probability of a double-dip recession. If a double dip did occur, then the stock market would obviously fall down fairly hard with it. Could the possibility of a strong market fall still exist? Yes, it potentially could happen.
However, based on the consistent and steady uptrends that the US and other countries are seeing on their manufacturing productivity, their GDP growth, and their market and company earnings improvements, the chances for a double dip are becoming increasingly remote. Of course it doesn’t rule out any market pullbacks. It simply means that another major bear market in the near future is very unlikely.
Bottom Line: There is still a significant amount of fear and uncertainty in the investing public today. MR believes that it is mostly unwarranted from a longer term investment standpoint. The recovery is occurring and the growth is slow but steady. The possibility of another large market drop or bear market occurring is becoming less likely with each passing month. This is exactly the time smart long term investors should be scaling into the equity markets and putting their money back to work.
Reason #7: Market analysts and stock market talking heads have been saying every year for the last 10 years that a huge amount of money is sitting on the sidelines and it is close to be invested. Their claim was that it was going to be put to use at anytime and it would fuel a major market rally. Obviously, they were not right, at least not completely. Well, after 10 years, MR believes they could finally be proven correct in the next few years.
Now, more than any time in modern history, individual investors are truly saving more and keeping most of their investment cash out of the stock market. It is estimated that over 13 trillion in cash from investors is out of the market, primarily because of fear. Furthermore, there is evidence of companies all over the world holding enormous amounts of cash on their balance sheets for similar reasons of fear and future uncertainty.
Some have even estimated the amount of cash sitting on the sidelines is greater than the world stock markets’ entire market capitalization value. This conjecture could certainly be made for the US stock market.
Obviously, the real fuel for the next big bull market will come from the deployment of all of this cash. It will come from investors and from companies. Investors and corporate executives need to get over their fears and feelings of uncertainty on the economy’s future and they will start to spend. It won’t happen overnight and many investors will take a very long time. The investors and companies that wait too long or that doubt every market rally will miss the next big bull run.
Bottom Line: The amount of money sitting on the sidelines with investors and on corporate books right now is truly massive. Once corporations start using that money again for future growth and expansion, mergers and acquisitions, and for rehiring employees, the markets will respond positively and quickly. And, more importantly, once investors realize that the worst is over and that the economy is really recovering for a sustainable period of time, their cash infusion will cause the markets to really take off. The time for putting this cash back to work for corporations and investors may not be too far off. The time to get in as a long term investor is before that happens in order to catch the ride.
Reason #8: The amount of money that is currently parked in US Treasuries is astronomical. It is invested in Treasuries of all durations and the owners are scattered throughout the world. As the level of fear subsides, massive amounts of treasuries will be sold and put back into the stock markets and other areas of investment to get higher rates of return. This will help stimulate the next bull market in stocks.
The largest owner of US Treasury bonds is the US government itself, followed by individual investors and savings bond holders, and then China and Japan. The rest of the list clearly indicates the immense money that has been invested, including a large amount recently in the 2nd quarter of 2010. Of course, the primary reason for most of the investment, outside the governments, is Treasuries are a safe haven for cash. The level of fear is still high and the treasury investing amounts have been increasing since the early part of April 2010. As the recovery takes hold and more confidence is gained on its sustainability, the potential “treasury bubble” will burst and the flooding of cash back into investments could be fast and furious.
Here is a high level overview of the major US Treasury Bond stakeholders:
Bottom Line: The amount of money sitting in very low yield US Treasury Bonds is currently at historic levels. This is the safe haven for protecting cash. As the recovery takes hold and more confidence is built on the fact the worst is over, the Treasury Bonds will be liquidated from most of the stakeholders shown in the table above and the cash will be invested. There is a possibility that this could be a bubble waiting to burst. Once the flood gates of selling commence, it could be fast in an attempt to chase performance in other areas of investment, primarily in the stock market, before it is too late. Don’t wait for all of that money to be quickly deployed. Start scaling into equity markets now, and especially on any market pullbacks.
Reason #9: The US Dollar’s value has been in a steady but declining pattern since 2002. It is very important that it stays measured in its decline and the fall doesn’t accelerate, but the fact that is falling is actually bullish for US companies, commodity companies, and equities in the US stock markets in the short run. And, bullish US stock markets lead to bullish world-wide stock markets due to their directional influence on other markets.
A significant part of any US bull stock market is the contribution of large US multi-national companies and their earnings growth. Because many of these companies are seeing their international presence increase, a falling dollar, which makes their goods more attractive to buy, is a good thing for their top line growth. Getting more earnings growth is essential to get the markets moving up again towards a sustainable recovery.
Secondly, one of the largest catalysts in the 2004 through 2007 stock market years was the underlying strength of commodity related companies. The primary reason for the strength was the increasing demand for the commodities themselves but also the falling US dollar. Worldwide commodities are traded in US dollars.
A falling dollar makes the commodities cheaper and therefore more desirable. The increased demand fuels profits and bottom lines for the commodity related companies. If you couple that with the large percentage of commodity related equities that are in the US stock market, this can help jumpstart a bull market.
Remember, the US stock market use to be the only predictor needed for the entire world stock markets’ trend. If the US market was going up then most other countries’ markets followed. And, while there are several other factors now contributing to the trend direction of world equities (i.e., China, currency pairs, etc.), the US stock market is still a significant factor. So if the US stock market starts to heal itself and gain some strong upside momentum due to the help of a falling dollar, then the other world stock markets will follow it up.
Bottom Line: A steady and measured decline of the US dollar is bullish for the US stock market in the short run. Eventually, the macro picture of inflation will start to hinder growth. But, in a low inflation environment like the one the US is currently in, it is good. The US dollar will not collapse and it is still the ultimate safe and dominant worldwide currency with no real competitive threat for many years. It enables many of the US companies, the multi-national and commodity related ones in particular, to increase their earnings growth. This growth will help to encourage more investing in the US markets which could set up a new bull market in the United States that other world markets will follow.
Reason #10: The S&P 500 recently created a very bullish candlestick reversal pattern underneath its 200 SMA. Not only is the “Morning Star” a bullish reversal signal, but a very large percentage price move in a “Blended Morning Star” is even more powerful. When this pattern is associated with a move up of over 3% in a single day (July 7th) while the market is below both its 50 SMA and 200 SMA, then the typical 6 month average return has historically been 7% and the 12 month return 17%. The July 1st low has a high probability chance of being a significant market low for some time to come.
Technically speaking, a sharp and high percentage downtrend is the first important part of creating significant market low. That was achieved with a 17% peak to peak downtrend from the high of April 23 at 1217 to the low of July 1 at 1011. That large of a market move in only a little over 2 months has only happened a few times in the S&P 500’s history. It created an extremely oversold condition.
The next important element of a significant market bottom is to have a very forceful bullish candlestick reversal pattern. There is no stronger bullish reversal signal than a Morning Star shown below.
To take this pattern a step further in strength, there are rare occasions when a “blended morning star” is created. What makes the candlestick pattern a blended morning star is the fact that the consecutive daily candles form a much bigger overall pattern. This very powerful blended morning-star pattern, created in early July, is shown in the diagram below. The first blended morning star is shown inside the purple square. Its total move up (white or open candle length) from 1010 was equivalent to a price move of +8.8% to the 1100 level. There is also an even larger blended morning star outside the purple square that ends at 1120. That move up was equivalent to a +10.9% move.
Bottom Line: A very powerful “blended Morning Star” candlestick reversal pattern occurred in the S&P 500 in early July, 2010. It is very rare to have such a strong reversal pattern occur with this magnitude (9 to 11%) and especially with a +3% up single day while under the 50 and 200 SMAs. In fact, having a 3% up day alone under those two moving averages typically leads to a 17% average market gain in the following 12 month period. This technical analysis pattern stands a high probability chance of predicting a significant market bottom low that may hold for the rest of 2010 and beyond. Time will only tell whether the high confidence level in this pattern holds true to form.