BOSTON (MarketWatch) - Maybe everything is about to fall apart. Maybe the Dow Jones Industrial Average (DJI:DJIA) is heading back to 6,000. Maybe those of us who survived Hurricane Irene - which brought a devastating, er, breeze and light drizzle to central Boston - should be piling up the sandbags and setting up the shutters for the real hurricane about to come out of our financial system.
After all, all the problems remain. Europe is bust and so are we, economically and politically. The system is a house of cards. Equities remain expensive by some measures. We may well be heading into another recession assuming, for the sake of argument, that we ever really left the last one.
In Washington and Brussels, political attempts to fix the various crises look about as ordered as this.
But everyone is already so bearish. And you get nowhere in this game agreeing with the consensus. So while my head is still deeply skeptical, my heart wants to see the silver linings to all these clouds.
- It's the end of summer. Once upon a time, September and October used to be the cruelest months on Wall Street. Once everyone had worked that out, they simply moved their selling forward. Now you could argue the summer is the worst time. We saw hefty selloffs in 2007, 2009, and 2010 before autumn rallies. (The obvious outlier, of course, was 2008).
- We've just had a big correction. In total the Dow Jones U.S. Total Stock Market (DJW:DWC) fell about 20% from peak to trough - a hefty fall. Overseas markets have also tanked. A fall this sharp and widespread usually clears the air and produces some decent values.
- We've formed a double bottom - actually, a triple bottom. When the market tanked earlier this month, the Standard & Poor's 500 (SNC:SPX) held at around 1120 on Aug. 8, and tested the level successfully on the 10th and the 22nd. Make of it what you will, but chartists would call that pretty bullish.
- Mom and Pop are still bearish. It's a depressing reality that ordinary investors tend to sell stocks at the wrong time and buy at the wrong time. There's evidence for this going back decades. You could actually have made money over the long term by just buying when the public sold and selling when the public bought. And right now, they are selling big time. The latest data from the Investment Company Institute, the mutual fund association, shows that ordinary investors withdrew a hefty $84 billion from U.S. equity mutual funds from the start of May through mid-August, and TrimTabs estimates they withdrew another $14 billion last week.
- Insiders have been buying. According to a report by Bloomberg, a few weeks ago top executives were buying stock in their own companies this summer at the fastest rate since the March 2009 market bottom.
- Companies are buying up stock. TrimTabs reports that companies bought nearly $100 billion of their own stock just in July and August. They can do so with borrowed money and thanks to the raging bullishness in the bond market, can pay next to nothing in interest on the money. This is a huge transfer of wealth from the bond market to the equity market and suggests one should be most wary of bonds, not equities.
- People need to keep their money somewhere. And Ben Bernanke has just announced a war on cash, with interest rates guaranteed to stay on the floor for at least another two years. Meanwhile, you can find armloads of blue-chip stocks with well-covered dividend yields above 3%.
- Stocks only look really expensive when measured in depreciating dollars (or "American pesos," as a friend in the currency markets calls them). When measured in a hard currency like, say, Swiss francs (ICAPC:USDCHF), the Standard & Poor's 500 is down two-thirds from its 2000 peak and is nearly back to 2009 lows. That makes blue-chip stocks, in particularly, look like an increasingly cheap claim on the growing revenues and earnings they earn from abroad - and will doubtless also make them more attractive to rich overseas investors, like the Chinese.
- Everyone is still really nervous. And that ought to be bullish. The Vix (MDE:VIX) , the so-called "fear gauge," is a lofty 32; TrimTabs notes it has closed above 30 for 21 days in a row. Investors continue to buy more "put" options, to protect against a crash, than "calls," which bet on a rally.
- Institutional investors have panicked. The latest Merrill Lynch/Bank of America survey of global money managers found their cash levels this month surged above 5%, the highest level since... March 2009, and nearly as high as November 2008. Merrill calls this "capitulation" and says it "triggers a buy signal for equities."