History Suggests Markets May Suffer Further

In yesterday’s Financial Times, John Authers penned an in-depth article questioning the notion of “stocks for the long run” (never did like that Jeremy Siegel) and setting off some discussion among market bloggers. I’ve never paid much attention to general market theories and a study can be devised to support any hypothesis – value, growth/momentum, US Treasuries, buy-and-hold, etc. Ah, the wonders of backtesting!

Authers also writes a daily “Short View” column and yesterday’s edition seems more relevant than debating stocks vs. bonds in light of the current market rally. He references Russell Napier’s Anatomy of the Bear, a great book and one that I’ve been reviewing in parts. Authers mentions that in previous great bears, markets bottomed when commodity prices stabilized. He then wonders whether the recent rebound in commodities points to a bottom in the stock market.

Perhaps the “Short View” is too short to include a complete view but Napier’s book gives far more insight than Authers implies. Stabilization in commodity prices, based on increased demand at lower prices, was only one of many markers indicating a bottom. Other important markers include a sell-off in government bonds followed by a broad bond market recovery preceding the stock market bottom, increased auto sales and a Dow Theory confirmation.

But Napier found the most accurate market for predicting major bear bottoms to be the Q ratio, which fell below 0.3x replacement cost in all four instances. This post suggests the recent March lows brought the Q ratio to 0.43x.  This doesn’t mean investors shouldn’t be selective and open new positions but money management becomes important in such an environment.

In the end, all this talk of stocks and bonds and bears (oh my) is a bit of a red herring, especially for value investors. If an asset is selling at a great discount to its true value, it makes little difference whether it is a bond or a stock. Attempting to time the bear market seems foolish but at the same time, it is important to keep some powder dry when everything looks cheap but keeps getting cheaper. A delicate balancing act, to be sure.

I apologize for the slow pace of my posts in recent weeks. My wife and I are looking at buying a house for various reasons (Helicopter Ben is one of them).  I will be completing my review of Napier’s book this weekend but in the meantime, you can find the first three parts below:

More on this topic (What's this?)
U.S. Dollar Value Could Suffer Instant Change
Bonds in Puerto Rico
Read more on SUFFER, Bond Investing, Commodities at Wikinvest

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