Written before yesterday's sharp rise, stock market historian and advisor Jim Stack had forecast an "imminent bottom" for the market. A long-term timer, he is not looking for quick pops and drops; rather, the "safety-first" money manager focuses on slowing positioning his portfolio for long-term, secular trends.
Indeed, in his InvesTech Market Analyst he was among the few to accurately forecast the current crisis; over the prior year and a half, he predicated both the bust of the housing bubble and the derivatives-based meltdown that would result.
After maintaining a defensive, cash-heavy portfolio during the market's downturn, he is now becoming more optimistic, noting, "All of our bearish extremes readings that precede the best stock buy opportunities are now in place."
Stack explains, "How can we put this bear market in historical perspective? No doubt about it, this bear market is a whopper – both in size and severity.
"With a 42.5% loss in the S&P 500 Index, it is rapidly closing in on the big bear markets of 1973-74 and 2000-02. In fact, no bear market in the past 70 years has declined over 50%.
"In severity, this bear has unfolded much faster than past bear markets, wiping out $6.7 trillion in stock values in barely 12 months – equivalent to over 90% of the loss in the 2000-02 bear market in two-fifths of the time
"In measuring impact on investors' portfolios, this bear has 'repossessed' more than 84% of the prior 5-year bull market gains! Both the DJIA and S&P 500 Index are back to price levels seen over 10 years ago in 1998.
"Why has the stock market decline turned so precipitous in the last few weeks? In bigger bear markets, investors always end up throwing out the baby with the bath water.
"That typically occurs once bear losses reach an extreme that many investors feel they just can't hold on anymore. In the current case, a lot of the broad-based selling is coming from 'forced redemptions' by hedge funds.
"These supposedly safe investments are losing money, and the high net worth individuals that qualify to invest in them are abandoning hedge funds in record numbers – with a record $43 billion in hedge fund withdrawals in September alone. We can be sure it's been a lot higher in the past couple weeks.
"What is the strongest evidence that the bear market is nearing an end? Increasing evidence points to investor 'throwing in the towel' type of capitulation: the highest number in over 56 years of available exchange data!
"Past extremes at similar levels occurred on May 29, 1962 (74%), August 29, 1966 (56%), May 26, 1970 (58%), and October 20, 1987 (57%) – all were either at, or within weeks of, the final bear market bottom.
"Readings such as we've seen usually coincide with temporary, if not longer-term, market bottoms – even during protracted bear markets like 2000-2002.
"Of the 10 most extreme historical 'Pressure Factor' readings prior to 2008, every one saw the stock market higher six months later – and the majority by double-digit gains.
"One reason investor fears are so high is because the current risks are so intangible. Most investors don't even know what a derivative or a CDO (Collateralized Debt Obligation) is, let alone who owns them, or what the consequences are in the event of default.
"Yet everyone's ready to panic when they suddenly hear that 'credit markets are seizing up.' To some extent, this borders on nuttiness.
"Not that the current mortgage debt and derivative problems aren't serious and require massive government intervention. But the sky is not falling, and the financial world is not coming to an end.
"At this point, we believe a market bottom is imminent or perhaps already in place, but volatility is likely to continue with the market retesting its lows."
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