1. You can't fight the Fed. The Fed just cut interest rates by 50 basis points. Inflation is at an official 2%, which means by the spring they are going to cut some more. (Word on the Street is they will cut by another whole point, which would drop the rate from 4.5% to 3.5% and launch the market.)
2. Money in the hopper. There is almost $1 trillion now on the sidelines in private equity firms like Blackstone. There is another $1.3 trillion that China has accumulated in foreign currency, $250 billion of which they used to set up an investment fund to buy equities. Big oil states like Saudi Arabia, Russia and Venezuela are flush with cash; they too are setting up national equity funds. What better place to invest than in cheap (1.50 U.S. dollar = 1 euro) American equities?
3. Earnings, earnings, earnings. The U.S. market has been ignoring strong earnings gains. I've been harping on this for about a year now. The S&P 500 has been selling at its cheapest multiple for 15 years. In relation to interest rates, the S&P 500 is as cheap as it has ever been since 1979.
4. Seasonality. November ends the worst-performing six months of the market. Sell in May and go away, means buy in November and hold till late spring.
5. Volatility as represented by the Volatility Index (VIX) is at 28.93 and looking like a triple top. This is a contrary indicator. In the past when it was this high, we've seen significant broad-market rally. This ties into No. 6.
6. Contrarian's dream. Everyone hates this market. Talking heads are kicking around the word "recession" as a real possibility. Every day, the media says stocks are off due to "subprime meltdown" or a major write-down by a large bank. The best time to buy is when the wall of worry is the highest and ramparts of anxiety are the thickest. If no one is buying, you should be. You can sell it back to the herd at a much higher price.
7. Capitulation low. The Dow Industrial Average has sold off more than 1,000 points in the past five weeks. It has been down for the past seven trading days. This is too much, too fast. Trends average three to five periods. The U.S. market is poised for a bounce. Furthermore, the Hang Seng was up 5.7% over the last five trading days, which suggests that buyers are willing to step up.
Christian DeHaemer is Editor, RedZone Profits