You may feel like responding to the bloodbath on Wall Street by running and hiding, but you may be better off buying and holding instead, even if you're a risk-averse investor. Here's why, based on research by James Stack, editor of the InvesTech Market Analyst newsletter and a money manager who takes a conservative, safety-first approach to investment:
The stock market is extremely oversold. A measure that Stack devised called the "short-term pressure factor" fell to -169 last Thursday. That was just the seventh time in 60 years that it was as low as -160. The market was at least 19 percent higher a year later on five of the other six occasions. It was slightly lower a year after the sixth such reading, in February 2007, but first there was a rally of more than 10 percent, so investors who bought then had plenty of time to get out with healthy gains.
There are washouts, and then there are washouts. This is indeed a washout. Stack points out that the number of declining stocks on the New York Stock Exchange exceeded advancing stocks by a ratio of 77 to 1 on Monday. That is unprecedented, at least in the last 80 years, he said in a note to subscribers. To put that horrendous figure into context and get an idea of what it might mean for the market, Stack had to compare it to other days when the selling was just in-the-ballpark awful:
"If we . . . search instances with 40:1 ratios, we find two instances: The first is on Black Monday, Oct. 19, 1987, and the second occurred in May 1940 during the fall of France in [World War II]. I'll be honest in saying I don't think the economic risks today rival either of those instances. However, in both instances, the market was over 10 percent higher three months later."The selling pressure has abated in the last couple of days. Don't laugh, it really has, and that is often a necessary precursor to recovery from a steep drop. Stocks bounced on Tuesday and then gave back most of the gains on Wednesday, but trading volume on the NYSE and Nasdaq declined each day. So have new 52-week lows, going from 1,292 to 717 to 227 on the Big Board and 725 to 484 to 239 on the Nasdaq. Negative market breadth has also improved from the worst-ever 77-to-1 ratio on Monday to less than 3 to 1 on Wednesday.
Stocks yield more than government bonds. This one comes from Mary Ann Bartels, a technical analyst at Banc of America-Merrill Lynch. The plunge in the Dow Jones industrial average has left it with a dividend yield of about 2.8 percent, while the 10-year Treasury bond yields 2.2 percent. The last time the Dow yielded more than the 10-year Treasury was at the end of June 2010 and for several months in late 2008 and early 2009. The earlier period was near the end of the worst bear market since the Depression, and the later one was almost precisely at the bottom of the correction that interrupted the rally off the 2009 low.
I'm not a market historian, but other than those two instances and now, it's hard to imagine another time in the last 50 years when the Dow would have yielded more than Treasuries. Stocks may continue to go lower from here, but with so many indicators occurring so rarely and being nearly uniformly bullish when they do, this looks like a low-risk entry point into stocks, even if it doesn't feel like one.