Reasons To Be Optimistic

The bad news is that selling begets selling. Economic theory would tell you that at a lower price the demand for a product would be greater. Unfortunately human nature does not conform to economic theory. The lower stock prices go the more people turn negative and sell.  Market dynamics are such that when prices go lower certain people are forced to take a stop loss or "manage risk" or are liquidated due to excess leverage. It is difficult to know when this vicious cycle will end but it always does. There are numerous reasons to be optimistic that we are near the end of the decline.

At the end of March corporate insiders were aggressively selling shares and bankers were lining up IPOs and secondaries. This heavy supply of  new shares has been a negative for the market. Insider selling has slowed down significantly recently.  After the Facebook IPO flop the IPO and secondary market will be shut down for all practical purposes for a very long time. At the same time corporations continue to generate cash and repurchase shares. This week two significant M&A deals are scheduled to close, El Paso and Motorola Mobility. These two deals have a combined cash component of roughly $24 billion. This will be a welcomed injection of cash into the market.

The market is about as oversold as it gets, the put/call ratios are at a negative extreme and investor sentiment is sour. These are all conditions that are generally present at the end of declines. I believe that the conditions are ripe for a rebound and that purchases at current levels will be rewarded when the market finally bounces.

 

 

 

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