Looking For A Bottom


It is folly to think that you can consistently call the exact bottoms in bear markets (or, for that matter, the exact tops in bull markets). You won't. Sure, you might get lucky a time or two. But investing is a marathon, not a sprint, and if you bet big on your ability to consistently and precisely call market tops and bottoms your portfolio will most likely suffer.

On the other hand, it is not folly to seek some perspective on how current market conditions compare to previous periods when stocks bottomed or peaked.  Such perspective can help you make adjustments to an investment program at the margin.

Many investor-sentiment readings serve as "contrarian" indicators — the greater the level of investor bearishness, for example, the greater the likelihood the market has bottomed and is ready to advance. The thinking is that when everyone becomes bearish on stocks, no sellers remain, and stocks should bounce. Our research suggests investor-sentiment indicators work best at the extremes, when investors are especially bearish (or bullish).

According to Investors Intelligence, 38% of investment newsletter editors are bearish. That percentage is up sharply from the 16% reading in early April of this year. But is this level of bearishness typically associated with a market bottom? Well, newsletter editors got substantially more bearish during the most recent bear-market bottom (March 2009). At that bottom, more than 47% of investment newsletters had turned bearish. Thus, while the market may be in a bottoming process, investor sentiment as measured by this indicator is still not quite at the extreme levels one would associate with a bottom.

Another tool that provides perspective on investor sentiment is the trading behavior of corporate insiders — corporate executives, board members, and major shareholders. Because insiders are viewed as "smart money" — after all, no other group of investors has better information and insight than a company's insiders — insider buying is not a contrarian indicator. Rather, broad insider-buying activity is considered bullish. So are insiders buying the decline? According to TrimTabs, the level of insider buying in August was the highest since December 2008.

Insiders are notoriously early in their buying, so they may not be signaling an imminent pivot point in the market. Still, the bullishness of insiders and the bearishness of newsletters could indicate that this bear market has already given investors its worst bite.

Insiders are buying shares in two Forecasts recommendations — Exxon Mobil ($71; XOM) and J.P. Morgan Chase ($33; JPM). Exxon board member Edward Whitacre bought 10,000 shares of Exxon on Aug. 11, paying $70 per share. J.P. Morgan has had no less than three insiders buying shares over the last six weeks. Admittedly the J.P. Morgan buys, which occurred between $34.50 and $42.18 per share, have not yielded profits for the insiders. However, the Forecasts continues to view J.P. Morgan as the bank best positioned for year-ahead and long-term gains, and the buying by insiders buttresses our optimism. Exxon Mobil is a Focus List Buy and Long-Term Buy. J.P. Morgan is a Buy and Long-Term Buy.

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