Is stock market bottoming out?

Posted by Shyam Moondra

There were several instances when it looked like the stock market had bottomed out but then came more bad news and the market headed lower again. However, the behavior of the market in recent days suggests that DJ may have already hit the bottom at 7,773 on October 10, 2008.

It seems that the market is being hit repetitively by the same old bad news, leaving the valuation at a level as if we are headed to the 1930's era depression. The recession has come fast and furious but it's unlikely that it will last long for the following reasons:

1. In a concerted effort, the governments of major economic powers have been reducing interest rates to the levels not seen for decades, pumping liquidity into the markets at an unprecedented rate, and increasing expenditures via stimulus packages that will eventually revitalize the global economies.
2. The credit crisis is easing, as is evident from the inter-bank Libor rate that has come down to the levels not seen since 2005.
3. The latest housing data suggests that the housing market may be stabilizing. Recent positive actions by several major lenders will reduce the number of home foreclosures, which will help revitalize the housing market.
4. In general, the corporate balance sheets are very strong with unprecedented levels of cash. This explains why corporate bankruptcies are far fewer than seen during the past recessions.
5. The corporations were quick to adjust their inventories when the credit crisis first became evident. The current extremely low inventory level suggests that the industrial production may be ready to bounce, which will boost the employment.
6. The current stock valuations seem ridiculously low when compared with the valuations at the bottom of the past severe recessions.
7. The collapse of the prices of oil and other commodities is a welcome news for the consumers. The lower commodity prices will dampen inflationary expectations that will free the FED to reduce interest rates even more. Low inflation and low interest rates are generally good for the equity markets.
8. The incoming Obama administration is poised to cut taxes for the middle-class and small businesses, aid the ailing auto industry, and invest in alternative fuel research and development and infrastructure projects. These initiatives will boost employment and consumer confidence.

The current stock market is being driven more by fear rather than the economic reality. In this kind of market, as Warren Buffet said, investors need to be greedy.