Tsunami rally alert!!!Put on your rubber boots and shutter the windows – Octagon Capital Corp.'s technical analyst predicts we're about to be hit by a "tsunami rally."
Leon Tuey wrote in a research note Friday that "conditions are ripe" for a huge turnaround in the coming months, and that investors had best “abandon bonds and buy stocks” to take advantage.
"Conditions are in place for a monster rally," Mr. Tuey wrote. "There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity."
Skeptical, just because the market is down some 35 per cent so far this year? We'll leave it to Mr. Tuey to explain in his own words:
The unprecedented monetary growth and co-operation of the world's central banks will help to turn the economy around. Clearly, that's their goal.
Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic downturn.
By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it's 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.
Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in
Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.