By Michael Brush, MarketWatch
For anyone who owns stocks, the holiday season was pretty grim. But that’s behind us, and now it’s time to deploy the rest of any buying power you may have. Or put on a little margin if that’s the only way to increase exposure to stocks at this point.
The reason: The bottom is in, and 2019 will bring a 15% rally in the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.22% — or better.
How do we “know” the bottom is in? Of course, no one can know this for sure. But that’s what the weight of the evidence suggests. Here are five reasons why.
1. We saw capitulation
Once a selloff gets momentum, the key is to wait out capitulation. If you follow just one sentiment measure to gauge when the collective mood of investors hits extremes, make it the Investors Intelligence Bull/Bear ratio.
Whenever this survey of investment professionals falls below 1, it’s a sign negativity has peaked and it is time to buy. Following the market train wreck in late December, this sentiment gauge fell to 0.86. Bingo.
(Conversely, when this gauge rises above 5, it is a time to trim positions and be careful with stocks. It was above 5 last summer, one reason I was telling subscribers of my stock newsletter Brush Up on Stocks to be cautious on stocks.)
Two other measures I track also signaled capitulation. The VIX volatility index /zigman2/quotes/210598281/delayed VIX -0.78% recently spiked above 35. And the Cboe Options Exchange 10-day put/call ratio rose above 1. Both suggest that negativity probably peaked.
Read Avi Gilburt: Investors should prepare for a fake-out rally in the stock market
2. There’s no recession around the corner
While these signs say the selling peaked, you should never arrogantly write off big stock-market selloffs. The stock market represents the collective wisdom of every person who is smarter at economic forecasting than me (and probably you). That’s why economists say the stock market is a good leading economic indicator.
But we also know that investors routinely lose their heads and sell, or buy, to extremes. So the stock market isn’t perfect as an economic forecaster. In fact, since World War II it has been no better than that coin in your pocket. Near-bear markets or worse (declines of 19% or more) have predicted 14 of the last seven recessions since then, according to FactSet.
It’s unlikely we’ll see a recession soon, says James Paulsen, Leuthold Group’s chief investment strategist, because few of the typical signals have popped up. The yield curve hasn’t inverted. Junk bonds haven't sold off enough relative to safer forms of debt. We don’t see the kind of overheating that typically precedes recession. Inflation and interest rates remain subdued. Consumer and business confidence are solid but not at extremes. And there are few signs of excesses in the economy — like massive debt loads or the housing bubble that foreshadowed the financial crisis. Paulsen expects U.S. GDP growth to fall below 2% this year, but not turn negative.
3. Insiders are very bullish
The men and women with the front row seats on the economy — corporate insiders — turned steadily more bullish as the stock market declined late last year. They continue to buy more of their own company stock than they sell. This is rare and very bullish, according to Vickers Stock Research , which tracks insider activity.