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The Oracle from Omaha, Warren Buffet, spoke on Friday in an op-ed piece in the NY Times and revealed that he believed it was time to buy American stocks. His reasoning is quite simple and follows his long term investing philosophy, which is be fearful when others are greedy and greedy when others are fearful. To be fair, he qualified this by saying that timing was not his strong suit and certainly taking the position sizes that he prefers behooves him to develop those positions early on even if it means taking losses initially. One might add that he has deep pockets and might be an exception to the general rule that a market can remain irrational longer than one can remain solvent.

Now perhaps Buffet is correct in his prognosis of the US stock market but with a P/E ratio of the S&P 500 around 12 currently and an historical range that usually varies downwards to 6 or 7 at troughs, we suggest that he might be a tad early in his buying spree. Experiencing the latest freefall in the markets has convinced everyone that this is indeed a fierce bear market but even during the stock market crash of 1929, P/E ratios fell only from 32.5 to 21.1 from August to October. However as history shows, the trough in P/E of 5.6 was reached nearly three years later in June, 1932. Interestingly, we haven’t experienced a similar trough in P/E ratios since 1982.

At times such as this, it’s worth remembering that an economic contraction always follows an economic expansion and since 1982, there has been a long expansion interrupted by relatively minor contractions occurring in the early 1990’s and in the early part of this century. Both contractions were alleviated by government fiscal and monetary policies designed to mitigate the affects. A similar situation occurred in Japan after the Japanese markets peaked in 1989. The Japanese government deployed several initiatives to reduce the affects of the contraction and re-ignite the economy. All of these attempts largely failed though Japan did succeed in laying enough concrete per mile that it passed the US by a factor of 30 with regards to concrete infrastructure.

Now once again, the government prefers to take the interventionist route just like they did in the 1930’s, like they did in the 1970’s, the 1990’s and especially the past few years. Not one of these exercises prevented an economic recession and, in the last one, arguably did more to exacerbate the resulting recession that we have just now embarked on. By effectively delaying the contraction and pumping additional stimulus into the system, the government has potentially caused a deeper contraction to the previous excesses.

Ultimately, for one preferring to time the market, moments such as these are comparable to trying to catch falling knives. Stocks continue to weaken and though some are rebounding, patience serves us well for we do not feel it’s necessary to pick a bottom. The bottom will occur when it occurs and probably it will not be the final bear market bottom. We prefer the safety of the major direction in stock markets or the sidelines. It’s simply a choice of two options and neither is to be bullish on stocks.

Technically Speaking

We wrote last week:

This statement tended to be quite accurate this past week with the Nasdaq-100 peaking at 1470 and the Composite at 1897 while the broader markets saw lower peaks of 1044 on the S&P 500 and nearly 9800 on the Dow Jones Industrials.

The question then is whether there will there be a repeat test of these levels this week. Stochastics on the daily charts suggest otherwise owing to a turn down from neutral levels through the close on Friday but this is inconclusive. It is worthwhile noting that stochastics on the daily charts have had progressively lower peaks since July therefore a break in this pattern should be expected sometime in the near future especially after the very strong wave of selling that we saw last week.

There is no doubt that a test of these highs will be made at some point however weekly stochastics are not so oversold that a rebound is a 100% certainty. Judging by these weekly charts, prices could swing still lower before a significant rebound occurs. And with monthly charts on the broader indices exhibiting the familiar double top, there is an indication that these markets have much further to go before an ultimate bottom can be declared.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

New stops have been added in bold to the list while others have been modified. Those that have blanks are being carried unstopped for now. Please see our complete list of stops in the table below.

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price