Many Reasons to Be Bullish on Stocks

10/04/2010 1:00 pm EST

Focus: MARKETS

James Stack

President, Stack Financial Management

Jim Stack, president of Stack Financial Management and editor of InvesTech Research, tells why he thinks the market can continue to move higher in the weeks and months ahead.

Just a month ago, a survey of self-directed investors by MoneyShow.com showed only 33% bulls, as compared to 57% bullish in May of last year—two months after the stock market bottom.

In addition, the overwhelming majority (89%) did not believe the recession was over, with the majority of those convinced the recession would not end until after 2011.

One survey by the American Association of Individual Investors (AAII) sank to only 21% bulls on August 26th—the lowest level since the week prior to the bear market bottom in March 2009. Since that bottom, the 840-point market rally [in the Dow Jones Industrial Average] has caused the bullish consensus to recover to 51% bulls.

[But] keep in mind that AAII’s bullishness exceeded 50% in over three-fourths of the weekly surveys during the second year of the 2003-2007 bull market (from April 2003 to April 2004).

[Plus,] we are not seeing the negative leadership or deterioration in breadth that typically precedes a bear market. Market breadth or participation has also continued its breakout, with the advance/decline Line moving to new highs.

When viewing the quarter-by-quarter returns through the four-year election cycle, the quarters just ending have suffered the two biggest losses of all 16 quarters. However, the next three quarters—starting in the fourth quarter of the mid-term election year—historically provide three of the four biggest quarterly gains over the past 20 election cycles since 1929.

The current 1.9% dividend yield of the [Standard & Poor’s 500 index] wouldn’t have been too attractive just five years ago, but in the ultra-low interest rate climate of today it sizzles! And when you compare the earnings yield (where yields would be if corporate earnings were paid out as dividends) versus the 90-day Treasury-bill rate, it could be argued that stocks are at one of the most attractive valuations of the past 50 years.

Today, the average money market fund pays less than 0.1%. The far-from-alluring yield on a five-year certificate of deposit (CD) has fallen from 5% in early 2007 to only 2.3%.

Even tying up your savings for ten years in a ten-year [Treasury note] will yield a “whopping”

2.6%. Other than at the depths of the 2008 financial crisis, that is the lowest yield on ten-year Treasuries since November 1954—over 55 years ago!

And then you’ve got gold—the craziness of which we haven’t seen since the early 1980s, when gold temporarily soared to $850 an ounce. For some reason, gold is the only commodity that you can mark up by two or threefold, and then have investors scrambling as if they’re about to lose out on buying the last ounce produced.

As the risks of a double-dip recession subside, we think both investors and savers will start to realize the comparison with these alternative investments (including real estate) makes the stock market an unusually attractive investment today.

Subscribe to InvesTech Research here…

Related Articles on MARKETS