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I’m trying something new today. Over the past seven years (wow) I’ve used this blog as a forum for mainly three things. First, I’ve spent a good deal of time expounding on issues related to investing, the markets, economy, etc. Second, I’ve laid out how I view the markets through the charts I study. Finally, I’ve shared the highlights of the extensive reading I do every day. This post is an effort to combine all these into one and I hope to make it a weekly habit. I’d appreciate it if you would shoot me an email with your feedback whether you love it or hate it.

On Monday, I wrote that I thought it was time to buy stocks. My thinking goes a bit like this: stock strategists have never been more bearish over the past 25 years than they are today. Keep in mind that these are guys who literally get paid to be bullish and they can’t muster even the tiniest snort of bullishness. Over the past twelve months it’s literally mind boggling how much money individual investors have pulled out of stocks and put into bonds which pay them next to nothing. Main street and the media absolutely hate Wall Street, as they should. But after all of the scandals, flash crashes and outright frauds culminating in the Facebook IPO fiasco Wall Street may be nearly as hated as Al Qaida at this point. All of this is to say that sentiment is extremely negative and contrarians, like me, are very encouraged by this.

Still, stocks aren’t cheap. By my measures they are just about fairly valued when compared to history. My fair value number for the S&P 500 is about 1340. Interestingly, this has been an important area of support and resistance for chart watchers over the past few weeks (see chart below). Fundamentally, what makes stocks so attractive to me right now is one, the fact that expectations have come way down means that it will only take small positive surprises to drive prices higher, and two, when comparing stocks to bonds, stocks are more attractive than at almost any time during the past 40 years.

Likewise, bonds, which have now become the “go to” investment vehicle for retail investors, represent a HUGE risk. This is a new stance for me. I haven’t been one of those guys calling this a bubble for the past three years. In fact, I thought (and sometimes wrote) that long bonds were a good buy every time investors got too optimistic over that time. But right now I think is one of those times where individual investors once again prove they are lemmings. By selling stocks and buying bonds right at the wrong time they are running off of the proverbial cliff. To mix metaphors they have already run off the edge, like Wile E. Coyote, but gravity has yet to kick in.

There’s one more topic I’d like to touch on before the end-of-class bell rings. If you’ve read “FIRE Wall Street” you know I’m flat out ashamed of my industry. It gives me hope to see Main Street start to the see the light and shun the old Wall Street that has been taking them to the cleaners for decades. But shunning the stock market, or any specific asset class for that matter, is not the right response. In fact, it could end up hurting individual investors more than anything. So if you know someone disillusioned by a bad adviser or just a bad investment give them my book. I don’t get anything out of it other than hopefully bringing a little good karma to an industry that has built up plenty of the bad kind.

Reading the Tea Leaves

Stocks are ending the week on a tear. (Didn’t I say it was time to buy stocks?)…
…but the Transports aren’t confirming the strength in the Industrials. Dow theorists must have their panties twisted.
The S&P may be a better proxy for the general market and it’s clearly in an uptrend.
The Nasdaq is also breaking out above resistance…
…and the banks are trying to follow their lead…
…but small caps are clearly lagging. This is the major fly in my “time to buys stocks” ointment.
Overseas, it looks like China may be trying to make a double bottom…
…along with the Euro.

Hit the Links

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