The death of the bear market?

Are we now climbing the proverbial wall of worry? Is the bear dead? An increasing number of analysts think we may have seen the near term bottom.

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Who'd be a sharemarket trader? Markets up 2% one day, back down 2% another. One day a bull, the next day a bear.

Last week, the S&P 500 index had its biggest weekly gain since July 2009, up 6% on the week.

The analysts on Bloomberg were crowing…

"The economy is not great, but it's not as weak as some people expected. There's a good a chance we've made a bottom in stocks."

"Investor sentiment might be recalibrated. We're expecting this rally in stocks to be indicative of the whole quarter. There has been so much negative sentiment that the simple fact that we're now in earnings season and we have a new type of information hitting the market, that might be a catalyst."

Here in Australia, we missed out on much of the fun, with our S&P/ASX 200 only climbing 1% last week. We did however hit a 6-week high on Monday, taking the gains over the past two weeks to more than 11%.

In the Australian Financial Review, Richard Coppleson of Goldman Sachs said…

"…there's just too much bad news out there. But I think we're going to see higher lows than we've seen over the last few months or so. The risk trade is going to be off and on for the next few weeks but it will continue to work its way up slowly and quietly."

Climbing the worry wall
Coppleson is one of the most read and respected analysts in Australia. He's effectively saying the market will continue to climb its proverbial wall of worry.

And climb it is. A gain of 10% in just 2 weeks is a pretty decent start. Overnight, U.S. markets jumped 2%, sending the S&P 500 index to the highest level since August. Banks were at the forefront of the rally as optimism grew over progress on expanding Europe's bailout fund.

When the market is fearful, banking shares cop it on the chin. The memory of the GFC is simply too recent. People sell first, ask questions later. No bank investor wants again to see Commonwealth Bank of Australia (ASX: CBA) shares back down below $25, Westpac Banking Corporation (ASX: WBC) below $15 and Australia and New Zealand Banking Group (ASX: ANZ) at $12.

On the flipside, when fear subsides, bank shares rise. Nothing spectacular, but when they are trading on a fully-franked dividend yield of around 7%, you don't need fireworks to book yourself a decent return.

On Bloomberg, Jeffrey Saut was a little more excited at the action on Wall Street…

"We could be into one of those buying stampedes. It feels that the worst is in the rear-view mirror."

Buying stampede
A buying stampede? Maybe. But Mr Saut might be a little late to the party…

The Motley Fool's own Investment Analyst Dean Morel was banging the table in early October when he said it was time to get excited.

With the market up 9% since then and 11% from the absolute low, it's now a good time to reflect on what Dean said.

A few of Dean's key points were…

  • "I hope you're excited by the current sharemarket sale, as this sell-off is based on fear not fundamentals."
  • The economy and sharemarkets are too complex to predict, but you can judge what is happening at the time.
  • "The good news is there is no need to predict the future to succeed in investing. In fact the more time you waste predicting the future the less time you have to focus on what's right in front of you."
  • "What is in front of us now is a sharemarket on sale. Yes the market could get cheaper, but so what? That merely means even better bargains. Falling markets are only a concern to those unfortunates who are leveraged or need the money in the next couple of years."

We're not trying to boast or show off our predictive prowess. Dean isn't trying to claim he picked the bottom of the market, but he is trying to impress the importance of being able to both recognise sharemarket sales when they're on and take advantage of them.

Dean closed by saying…

"Spread your investments over the months and years ahead. Spreading your investments reduces the psychological pressure of investing. Doing so during market sales increases your likely returns and reduces your real risk."

He hopes you bought, but still have cash in reserve or quickly mounting up through savings. Dean reported he missed a couple purchases for his personal fund and trust by as little as a half a cent around the lows. But that's a story for another time…

Death of the bear market?
Dean thinks the current bear market may be dead…

Last week we mentioned how Dean was busily preparing for the launch of our new subscription-only investing newsletter. We're pleased to report he's making great progress, which is more than can be said about the name of the service.

Wallaby Herder
You may remember we encouraged readers to come up with a better name than The Motley Fool's Wallaby Herder. Frankly, the response was overwhelming. Thank you. We apologise if we haven't responded to you personally, as we're still working through the backlog.

Here is just a small selection of responses…

Love it – Linda & Bob

Stick with the Wallaby Herder – Brendan

Gold – Ben

Wallaby Herder is a great name. Much better than just being a sheep and following the crowd – Rohan

Try the Motley Fool Kangaroo Kicker – Raymond

Try Motley Fool's Wombat Warblers – Tania

How about 'Dead wombats don't bounce' – Lucas

Goanna Wrangler sounds about right, sharp claws to climb with, razor sharp teeth to rip flesh from unsuspecting prey, strong jaws to crush bone, acid like drool to help digest the feast, hide as tough as an elephant, can run, can hide and its beady little eyes can see all around it! A true survivor. – WB

What about the "The Motley Fool Bunyip Chaser"? Implies a reference to chasing the mythical beast (the high yielding, perpetual dividend paying, well-diversified, competently managed, cash rich stock) of the ASX. – Matt

The real value…
Names aside, the real value in the service will of course be in the share selections. And to that extent, Dean is busy working on the initial share pick.

It's a painstaking process whittling down a rather large watch-list to just one company, especially when there are so many to choose from. But if there is a perfect man for the job, it's Dean. He's been doing exactly this for close to 25 years, the last 7 years on a full-time basis.

We're currently working towards a mid-November launch. Dean is secretly hoping the buying stampede is delayed until the day after the first edition hits the wires. But really, it won't matter in the long-term. In 10 years, when we look back to now, we're likely to wonder why the market was so volatile.

The Foolish bottom picking line
If you've read anything from The Motley Fool, you'll know we're neither market timers, nor are we technical analysts. Personally, the only 'double top' we know is the soft-serve variety.

There's a very real difference between trying to pick the bottom and knowing when shares are undervalued. Looking at the ASX today, we have no idea – at all – whether we've seen the bottom. We simply have no way to forecast irrationality.

What we do know is that shares are cheap compared to historical norms and that pessimism and uncertainty reign. It might be uncomfortable, but that's exactly the time to buy. When optimism returns, the opportunity will have passed.

We'll keep you posted on the newsletter.

This article contains general investment advice only (under AFSL 400691).

Bruce Jackson  has an interest in all four banks. Dean Morel has no position in the top four banks. The Motley Fool's purpose is to educate, amuse and enrich investors. Readers can click here to find out one company Dean does own, The Motley Fool's Top Stock For 2011-12.

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