The Buying Opportunity of a Lifetime?

03/19/2009 1:00 pm EST


James Stack

President, Stack Financial Management

Jim Stack of Stack Financial Management and InvesTech Research, who has been cautious on the market for years, says we could be approaching multiyear market lows.

While there has been “no place to hide” in this bear market, there is extraordinarily good news on the horizon. For regardless of whether the bear market bottom is at hand or still lies ahead, we are heading toward a buying opportunity of a lifetime. Here’s why.

The best buying opportunities on Wall Street always come in the depths of a recession and after a bear market has “marked down” share prices to discount levels. The bigger the bear market, the greater the discount, which generally means the better the buying opportunity.

That’s also true of negative extremes in sentiment. Whether one looks at investors or consumers, the historical outcome is the same—the greater the gloom, the higher the probability you’re nearing a good buying opportunity.

The fourth quarter of 1974, the last half of 1982, any time during the early 1990s, and the first quarter of 2003 all represented the best buying opportunities of the past 40 years.

The record low in consumer confidence [last week] may not be the final low in this economic recession or crisis. But when we look back five or ten years from now, [it] will again be recognized as one of the best buying opportunities of the past 40 years. We may not be at that low, but we are approaching it.

Like consumer confidence, some important measures of investor sentiment have fallen to the most extreme (pessimistic) levels in decades.

One recent survey from the American Association of Individual Investors (AAII) showed that 70% of investors surveyed “feel that the direction of the stock market over the next six months will be down.”

Although this AAII survey only extends back to 1987 (22 years), [this] record bearish extreme reveals that we are again heading toward one of the best buying opportunities in decades!

Could last Monday’s (March 9th) low have been the bear market bottom? We won’t be able to answer that until at least several weeks down the road. Yet Tuesday’s rally off that low was extraordinarily strong: By the end of the day, over 12 stocks had advanced for every one that had closed lower. And the volume flowing into those advancing stocks outpaced volume into the decliners by an amazing 27:1 ratio.

How many total rally days have occurred in the past 50 years with similar advance/decline and volume ratios? Not one trading day on Wall Street in the past 50 years has seen that kind of lopsided buying pressure!

Could this painful bear market soon lead to one of those rare buying opportunities of a lifetime? When one considers that this is only the third time in the past century that the Dow Jones Industrial Average or Standard & Poor’s 500 index have hit a 12-year low—with the others in 1932 and 1974 at price levels never seen again—it just might be.

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