Weird Science

I don't know when to start or when to stop
My luck's like a button
I can't stop pushing it
My head feels light
But I'm still in the dark
--General Public

Many traders are positioning (or have positioned) for a near term bottom in the stock markets. But I'm largely out of the trading game. Instead, I want to position my portfolio as an investor with a longer term horizon.

So, what does a real investable market bottom look like? I'd like to quote market sage Richard Russell from his 1/25/08 remark:

What do I look for when I'm looking for a bear market bottom? The classic method of identifying the area of a bear market bottom has to do with VALUES. At great bottom such as 1932, 1942, 1949, 1974, and 1980-82, stocks were selling at great values. By that I mean that blue chips were selling at price/earnings ratios in the 10 and below range. They were also offering fat dividends, many in the 6 to 8 percent range and even higher.

Those were big bear markets, and they ended with stocks selling "below known values." That type of vicious, even brutal, bear market is rare, and they come along only once or twice in a generation. Whether we are operating in that type of extreme bear market, of course, I don't know. As I said, these bear markets are rare and associated with disastrous conditions. The odds are always against this type of bear market from appearing.

All true bear markets end in downside exhaustion. The public is out, traders have disappeared, most professionals are beaten, news is grim, and sentiment is black. One hears such expressions as "It's the end of capitalism as we know it," or "Wall Street will never recover from this one." The public is disgusted with investing. The newspapers are filled with horror stories of investors who have lost their money.

Are we in one of those bear markets now? As Russell notes, their rarity by definition suggests that the odds are against it. What I do know is that measures of aggregate market value are closer to tops than to bottoms, and achieving the P/E and dividend yield 'value' signals that Russell speaks of suggests lots of time and/or distance between now and then.

Moreover, we're nowhere near the sour sentimental context that Russell associates with a major bottom.

I suspect that Mr Practical thinks we're beginning one of those rare Bears. Like him, I think risk is high.

So I'm willing to wait for that time, perhaps years out, where I can 'buy the list' at attractive value.