Four Reasons For Investors To Be Long The Stock Market? (SPY, SSO, TNA, INDEXSP:.INX)

Keith Fitz-Gerald:  The market’s recent 45-day  rocket ride was the longest uninterrupted climb without a triple digit decline  since 2006 – until Tuesday when the Dow lost 203 points.  The sell-off begs the question: Should you buy the stock market dip?

First things first. The sky isn’t falling even  though there are a lot of investors who believe the worst after two tough days  on Monday and Tuesday.

In fact, if you remember your recent history, we  used to eat declines like these for breakfast. Two-hundred-point days were not  uncommon. For that matter, neither were  400-point swings only a few years ago.

What investors need to realize is this: The stock market has come a long way in a hurry since establishing panic-driven lows on March 6, 2009.

The S&P 500, for example, has tacked more than 100%. Compared to those gains, Monday and Tuesday’s losses are just rounding errors in the big scheme of things.

This means a portfolio worth $500,000 would be worth  $1,000,000 today if it had been invested in something as plain vanilla as an S&P 500 Index fund (NYSEarca:SPY) only three years ago.

On that basis alone, I could make the case this is the pullback everybody has been waiting for.

But  that’s the problem…everybody is  waiting on the same thing.

Waiting for a Stock Market Dip

According to various reports, most investors remain on the sidelines for reasons that are  as obvious as they are self-evident – worries about debt, politics, jobs and  the future dominate nearly every poll.

You can see that if you look at stock market volume.

It’s down 50% since the financial crisis began.  According to CNBC data, last Friday a mere 3.2 billion shares  traded hands on the NYSE. Three years ago, that figure was 7.5 billion on an average day.

This complicates technical analysis because it  limits the statistical validity of many analytics that might otherwise be functioning normally.

So what’s a technical trader to do?…

The same thing they would normally do: Look to the  past in an attempt to identify distinct patterns that have high odds of  repeating themselves in the future.
 
The key in today’s markets is the time frame.
 
In an attempt to discern what’s happening when the  markets go south, most traders begin turning to smaller chunks of data dropping  from daily charts into bars of 1 hour, 30 minutes, 15 minutes, or even  tick-level data.
 
What you actually want to do is go to a bigger time frame  like weekly charts. That helps you get rid of the noise and see the forest for  the proverbial trees.
 
Let’s take the S&P 500 as an example.
 
If you change the S&P’s chart from a daily to a  weekly as I’ve suggested, you can see some pretty nice similarities between the  upside move that began in July 2009 and the run that’s underway now.
 
There’s a rally that took us higher into April of  2010 and a summer correction that returned us to July troughs. Technicians refer to this as a cyclical bull market within a secular bull market.
 
Here’s where it gets interesting.
 
stock market dip
Figure 1: Source: Fitz-Gerald Research Analytics, Money  Map Press
 
If you  look at the chart carefully, you see there are also a few squiggles over that  time frame – pullbacks for lack of a better term – that ultimately led to more upside.
 
This is  what pros are referring to when they encourage buying “dips.”
 
I think the odds are good that we’re smack in the  middle of just such another squiggle and that investors should be buying the dips even if a few days of selling pressure do persist.
 
Heck, especially if we have more selling – because  it suggests we could see another 10-15% on the upside.
 
Fundamentally, this makes sense for four reasons:
 
Four Reasons to be Long the Stock  Market
 
  1. Generally speaking, most of the big “glocals” we favor are flush with cash, running leaner than they have been in  years and have built up the defenses necessary to weather a downturn without  undue impact on earnings.
  2. This is the cheapest 52-week “peak” in  terms of PE ratios we’ve seen since 1989. And there’ve been 34 of them  according to Bloomberg so this is not inconsequential. History  shows shrinking price/earnings ratios generally provide a margin of safety to  the upside.
  3. Corporate profits are predicted to reach  record levels through 2013 so there’s potentially another 12 months of runway;  to be fair I think it’s actually about eight because I believe profits will  contract a bit faster than other analysts.
  4. Team Bernanke and his central banker  buddies are in pom-pom mode. Further stimulus is not only likely, but highly  probable. This is absolutely wrong, but probably good for overall prices moving  higher since cheap capital is like drugs for the addicts. Ultimately, we will  have to pay, but that’s a subject for another time.

What if I’m wrong?

That’s part of the game. There are no guarantees.

Nobody knows the future, which is why I also  encourage the use of trailing stops to help protect capital and capture gains.

Not only do trailing stops remove the emotional  turmoil of tough days, but having them in place allows you to concentrate on  the upside – even when everyone else is concentrating on the downside.

Even that, though, is a bullish sign.

When it’s easier to scare the hell out of people than it  is to attract them to the markets, the smart money nearly always goes long.

Related: S&P 500 Index (INDEXSP:.INX), ProShares Ultra S&P500 ETF (NYSEArca:SSO), Direxion Daily Small Cap Bull 3X Shares (NYSEArca:TNA).

Written By Keith Fitz-Gerald From Money Morning

Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press,  as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the  world’s leading experts on global investing, particularly when it comes  to Asia’s emergence as a global  powerhouse. Fitz-Gerald’s specialized  investment research services, The Money Map Report and the New China Trader, lead the way in financial analysis and investing recommendations for the new economy. Fitz-Gerald is a former professional trade advisor and licensed CTA who advised institutions and qualified individuals on global futures trading and hedging. He is a Fellow of the Kenos Circle, a think tank based in Vienna, Austria, dedicated to the identification of economic and financial trends using the science of complexity. He’s also a regular guest on Fox Business. Fitz-Gerald  splits his time  between the United States and Japan with his wife and two children and regularly travels the world in search of investment opportunities others don’t yet see or understand.

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