According to Nick Majendie, Chief Portfolio Manager of Canaccord’s Independence Accounts many of the features of a market bottom are already in place, some of which include:
- Volatility as measured by the VIX has been at historic highs
- Net insider buying both in Canada and the U.S. is at all time highs
- The ratio of bears to bulls as measured by the American Association of Individual Investors signifies extremely negative investor sentiment, which is always present a market bottoms
- U.S. housing starts and consumer confidence are at levels that last were seen around the time of market bottoms in 1974 and 1982. Housing inventory levels actually declined last month
- Holdings of cash in the U.S. are now one third of the value of the S & P 500 and will provide the fuel for the next bull market when investor confidence returns
Given the aforementioned reasons, Majendie does caution however, that market bottoms are often shepherded by a retest of the lows with a prevailing period of immense volatility. He writes “The retest can happen within a month or as long as five months. In 1987, it took a month, in 1974 two months and 2002/2003 five months interspersed with a 25% rally.”
Majendie also points out that a turnaround in market direction requires leadership from the financial sector. In this regard, he notes that the Philadelphia Banking Index (BKX) has so far held its nose above a double bottom at 47 on July 15 and October 17. With respect to the Canadian Banks, Majendie is “hopeful that the banks might be in the process of forming a base that can that help launch a rally.”
Source: Special Canaccord Independence Accounts Bulletin Dated October 27, 2008
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