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Tags: hyman | blog | bull | bears

I’m A Bull Among the Bears

By    |   Monday, 23 July 2012 11:09 AM EDT

When I turn on the TV each morning all I hear is gloom and doom in the financial world. But what if someone could tune out all of the noise? Would they still be as bearish?

I say, “No.”

Why? Let’s take a look at stocks. The S&P 500 typically trades at price-to-earnings (P/E) extremes of around 7 on the low end and around 23 or so on the high end. Where is the P/E of the S&P 500 right now? It is sitting at 15.67.

So for me to be bearish fundamentally, I would need to see the S&P 500 approaching a P/E of 23 to 25. But at a P/E of 15, it is not terribly cheap. But by the same token, stocks are certainly not expensive by any stretch either. So historically, prices can still move to the upside given where the S&P earnings are at right now.

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Even when you evaluate many stocks based on their price-to-book ratio, stocks are cheap. Even when you look at the S&P 500, it is still below its median price-to-book ratio of 2.78. It is at 2.22 right now. So, stocks are trading cheap when judging it against historical book prices.

If you are a member of the Ultimate Wealth Report, you will notice that most of our positions trade well under their book values and at P/E ratios well below those of the S&P 500 right now. Therefore, I believe they have even more upside than the major averages overall.

But now let’s look at stocks technically on the charts. Again, if we could tune out the bearish sentiment on TV for a moment and just judge things as they are, we would see that the S&P 500 is trading above its 200-day simple moving average. It is also above its 50-day simple moving average. These are both bullish signs for stocks because it shows that stocks are still heading upward overall.

Moreover, the moving average convergence diversion has broken its downtrend and has climbed back up above its zero line. That is another sign that says stocks are more likely to continue higher than to reverse downward.

Now, will we see some down days? Sure. No market goes straight up and this one will not either.

I believe the path of least resistance is upward, not downward. But I do not believe you can get many people to see that right now. For instance, short sales on the New York Stock Exchange have climbed higher as of last month than they were at the last short-selling peak on September 15th of last year.

During that time, the S&P 500 was trading around 1,125. But the S&P continued to climb 300 more points, to 1,425, before it was all said and done (just six short months later).

Today we have the same thing happening.

You see, the masses almost never get it right. So, if everyone is bearish and thinks the market is topping, then it will likely continue on higher. Why? The masses never see a top ahead of time, and they certainly do not see a market bottom ahead of time either.

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Toward a true top, you cannot talk them out of their positions. And toward a market bottom, you cannot beg them to get into a new stock position. Why? They are emotion-led in their investing and react rather than think things through rationally.

We have bucked the crowd in the Ultimate Wealth Report and it has paid off. We bought stuff no one wanted, like a natural gas stock, an oil stock and a steel/iron ore stock. No one wanted them because they heard things were slowing down in the U.S. and global economy. Yet, I ignored the crowds and we took a position in sectors that I believe are turning around.

Sure enough, all of our positions are up right now, in a time when everyone thinks it is dumb to be in those sectors. But when everyone thinks you are crazy for being in what you are in, you have probably found something.

If everyone gives you pats on the back and always talk about how smart you are, then you should get worried. Why? The masses do not make smart investing decisions. They usually have worse stock returns than do the major market averages, and they certainly have no better track record than what the major stock market averages do.

If you want to get outsize gains, you will have to tread where no one else thinks it is wise to tread. You will have to see value where they cannot. You will have to see opportunity where they do not.

This is what I do each month in my newsletter and it is paying off for my subscribers and me nicely. I would encourage you to do the same.

Do not listen to all of the hype out there. Independently analyze stocks, fundamentally or technically (or like I do using both). See what that tells you. Let it determine whether stocks are priced too high or if they are presenting a great value.

I am finding some gems right now for my subscribers. And if you take this same approach, you can too.

About the Author: Sean Hyman

Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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Monday, 23 July 2012 11:09 AM
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