December 4, 2018

“I have a tremendous contempt for this market…it cuts your heart out.
…It’s very hard to be very positive about the market, unless you’re an idiot.”

– Jim Cramer, November 26, 2018

“If you can keep your head when all about you are losing theirs…
Yours is the Earth and everything that’s in it.”

– Rudyard Kipling

Last Monday, Jim Cramer seemed to “lose it” on CNBC, saying, “I have a tremendous contempt for this market, because every time you try to make money with it, it cuts your heart out. That’s a bear market.”

The classic definition of a bear market is a 20% retreat from the previous peak in a major market index. The classic definition of a correction is a 10% decline. Cramer’s math is a little different. “Who cares about the S&P? It’s individual stocks that are down 40 or 50 percent.” Of course, some stocks are down 50%, but if some big-name stocks are down that much, other stocks are flat or even rising. It’s pure math. You can obsess with the stock that is down 50%, or the one that’s up 5%. That’s why we have indexes.

Cramer kept his emotions at “red-alert” levels, saying, “People come in and get their heads cut off. I just feel ashamed. It’s very hard to be very positive about the market unless you’re an idiot.”

Well, call me an idiot. I don’t trade every day, or every week, or every month, and I don’t watch hyper-ventilating or emotional gurus who push buttons on the air an hour or more a day. But fast action seems to be what viewers want. Entertainment value lures more eyeballs, and that’s what advertisers will support.

In the week following Cramer’s rant, the Dow and NASDAQ rose over 5%. In fact, last week was the market’s best week in seven years. That doesn’t mean we’re out of the woods. Cramer might still be right, and the market may go down yet again, but we actually closed November UP in all the major averages:

Stocks have been on a yo-yo string all year, with six up months and five down months – a strong January, then a big plunge, a slow claw-back and then another big plunge, and now another start of a recovery with one month to go in a troubled year, but the big picture is a 314% rise in the S&P since March 9, 2009 (despite several major corrections) and a 30% gain since Donald Trump was elected.

Buy When Sentiment is “In the Dumpster”

We have been waiting for a “day of capitulation.” Maybe a breakdown from Jim Cramer is enough, but I prefer to look more logically at market history for guidance. Using the S&P 500, since this bull market began almost 10 years ago, there have been six corrections of 10% or more, including two in the last year. If you want to stretch the traditional 10% measuring stick a tad, there have been eight corrections of 9.8% or more. We also came close to a 20% bear market trigger in 2011 with a 19.4% decline in the S&P 500. In each of these cases, the proper response was to BUY stocks, not panic.

By what logic would Mr. Cramer (or anyone else) say that the proper strategy in the seven previous instances is no longer the proper strategy today? To argue this case, you need to point to a situation of deteriorating fundamentals, such as higher P/E ratios (not so); falling earnings (nope); a looming recession (not close); or significantly higher inflation, interest rates, or taxes (no, nope, and nada).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Each of those previous dips tells a story I remember well. The first big dip in 2010 came during the first major Euro crisis, centered in Greece. The second (largest) dip in the summer of 2011 accompanied a second European crisis with the added circus of a threatened shut-down of the U.S. government following a sovereign debt downgrade of U.S. Treasury bonds and a partisan debate over the debt ceiling. We also saw two terrible crashes of 12% or more within just six months in the summer of 2015 and early 2016.

Let me focus on the last big (13.3%) decline of early 2016. From the start of 2016 to February 11, the Dow Jones Industrials lost 1,765 points in just six weeks. Gold was up 16.6% in six weeks, and oil fell to just $26. According to a CNN/Money posting on February 11, 2016, gloomy feelings stalked Wall Street: “There’s a broad-based lack of confidence,” said Anthony Valeri, investment strategist at LPL Financial. “Everything suggests this market is heading lower in the short term. Psychology is too frail.”

Economist Ed Yardeni’s February 11, 2016 briefing (“Waiting for the Other Shoe”) said that the Investors Intelligence Bull/Bear Ratio fell to 0.63 (the lowest reading since March 2009) and “bearish sentiment climbed to 39.2% (the most bears since October 2011) from 38.1% and 35.4% the prior two weeks.”

That week Fed chair Janet Yellen said that the U.S. is “taking a look” at negative interest rates, which led PIMCO to warn in a report that day (February 11) that negative rates may be having a “chilling effect” on financial markets and carry “unknown consequences.”  At the time, I wrote this headline in Growth Mail (for the week of February 15, 2016): “Market Sentiment is in the Dumpster (That’s Good News).”

On February 11, 2016, the S&P 500 bottomed at 1,829. As of last Friday, it is up 51% from that low. As for sentiment, the American Association for Individual Investors (AAII) was only 25.11% bearish at the market peak of October 4, 2018 but the bears rose to 47.14% on November 22, after the market sagged.

Due to rising earnings and flat prices so far in 2018, growth stocks now cost 17.7 times forward earnings (down from 21.6 last January) while value stocks cost an average 13 times forward earnings (down from 16.6 last January). Growth stock P/Es are far below their “bubble” levels of 40+ in 2000. (The S&P’s overall forward P/E is midway between the growth and value numbers at 15, a modest historic level.)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In my view, we should do the same thing now that we did in February of 2016 – buy, or just hold on.

And don’t forget – November to April provide the best six months of the year for stocks, and November already delivered a bit more than its historic norm (1.8% vs. a normal 1.5%), so let’s not panic just yet.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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