The old adage buy low, sell high played out Tuesday morning with a vengeance, as investors snapped up battered bank shares at a discount. Meanwhile the Dow Jones Industrial Average roared back - at least temporarily - ahead of an announcement from Federal Reserve Chairman Ben Bernanke.
Although Standard & Poor's downgrade of the United States' credit rating sparked global fears of a 2008 redux, perhaps the mass hysteria is a bit overblown. A quick scan of the headlines says as much.
Matt Freund, the senior vice president of investment portfolio management at USAAA Investment Management Co. told Marketwatch that "unlike three years ago, corporate balance sheets are healthy, liquidity is plentiful and the level of speculative investing is down dramatically."
Now considering the weak fixed income trading environment, staggering jobs cuts currently going on throughout Wall Street, and the debt crises in Europe and the U.S., one could easily argue Freund is pushing some rather wishful thinking.
But Thomson Reuters columnist Felix Salmon agrees that savvy investors can do well in this market with a simple rebalancing of their portfolios toward stocks.
That said, however, one strategy might make sense, given what's happened to stock and bond markets of late: a simple portfolio rebalancing. What's your ratio of stocks to bonds? If you had it where you wanted it a few months ago, then right now, with stocks down and bonds up since then, you're likely overweight bonds. So sell some bonds (they're very expensive, thanks to all this panic), and buy stocks with the proceeds, until you're back to your optimal asset allocation.
And while you're at it, you might want to revisit that asset allocation, and ask yourself whether having all that money in bonds is particularly smart. If you're invested for the long term - a 10-year time horizon, say - then a 2.4% yield over those 10 years is utterly pathetic, and can easily get eaten away by inflation alone. Meanwhile, with expected earnings of $99.83 per share this year, the earnings yield on the S&P 500 is a whopping 8.8%.
This is one of those times that stocks genuinely look safer than bonds. They might well go down, of course, in the short term. But on a relative-value basis, they're looking decidedly cheap.
Marketwatch's Mark Hulbert also argues that corporate insiders are taking advantage of the massive selloff in the equity markets to hunt down bargains.
For insiders transactions last week, according to the latest issue of the Vickers service, which I received late Monday night, this sell-to-buy ratio stood at 1.68-to-1. That's bullish, according to Vickers, since the long-term average level for this ratio is between 2 and 2.5 to 1.As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio
To further put the current level of this ratio into context, consider that in the week ending July 22, this ratio stood at 6.43-to-1. And among those companies whose stocks are listed on the NYSE and the AMEX, the ratio during that week stood at 13.10-to-1 - which is the highest, and most bearish, reading for the ratio since Vickers began collecting data in 1974.