A “Fasten Your Seatbelts” Week in the Market

The last couple of weeks have not been for the faint hearted. In the nine trading days from March 10 to March 20, the Dow Jones Industrial Average was down 153 points, up 416, down 46, up 36, down 194, up 21, up 420, down 293, and up 261. It started on March 10 at 11,899 and ended March 20 at 12,361, so the overall result was a gain of about 462 points. The Tuesdays in both weeks showed gains of over 400 points, and that prompted one observer to suggest that the market should only be open on Tuesdays.

Last week saw the winners in the market over the last couple of years, oil stocks, foreign stocks,  gold stocks, and metal and steel stocks, get hammered, with all ending up with huge weekly losses. On the other side of the coin, some of the downtrodden groups, banks, real estate, and homebuilders, all surged to the upside, as bargain hunters rushed in to buy.

Selling climaxes come about when stocks make new 12-month lows, but close the week with a gain. They are a good sign and often indicate that smart money is in there picking up the stocks that other people are dumping, causing new lows. The effects of this accumulation are not immediate, but four months or so later, around 80% of the buyers can be seen to have done the right thing. This year, every single week has seen more selling climaxes than buying climaxes. A total of more than 200 is considered a very large number, and we saw 348 in the week ended January 14,  a record 1,385 in the week ended January 28, and 577 last week. The 1,385 was unprecedented and more than double the previous record. These large and multiple numbers are a very bullish sign.
Every once in a while, the results of selling climaxes can be pretty dramatic. The week before last, Freddie Mac had a selling climax at $16.59 and this week, it hit $34. This week, Fannie Mae hit $18.25, but ended up at $34.39, and Lehman Brothers hit $20.25, but ended up at $48.65. Panicky people, who dumped these stocks at the lows, missed gains of over 100% in two of them and close to 100% in the third.

Just looking at the selling climaxes for the weeks ended March 14 and March 21, there were a combined total of 835 climaxes. There is some duplication, with a small number  having climaxes in both weeks. Of the total, 111 of the stocks were components of the S&P 500. That is more than 20% of all the stocks in that average. The S&P 500 is made up of large blue chip stocks, and this large number is a small indication that bigger stocks may do better than smaller ones for a while, a strong sign that stocks are making a bottom.

At the same time that we have been seeing all those selling climaxes, we have also been seeing very, very bullish readings in our sentiment readings and industry group oversold levels. We have also seen corporate insiders buying stocks at about the same pace that they did at the market bottom in 2002. The Federal Reserve has been cutting interest rates since last August. These are all very bullish factors that indicate the market is in the process of making a bottom and will soon be a new bull market. We have been underinvested for some time and will now begin to increase our portfolios’ invested position over the next few months.

Bear markets are the equivalent of “sales.” In a bull market, stocks gradually get somewhat overpriced and then more overpriced. People’s confidence in the market is very pessimistic when the bull market starts. But as it progresses, confidence starts to build and after a while, we start to see more and more optimism. In the bear markets, stocks give up most or all of their bull market gains, prices fall, and loads of individual stocks sell at big discounts from their highs.

Some of the stocks with selling climaxes that look attractive follow. These are good companies and should do very well when the market turns to the upside.
*Allstate. This large, blue chip insurance company has dropped from a buying climax high of $66 in December 2006 to a selling climax low of $45. It is currently a little bit above that at $48, and is selling at around six times earnings, and the current dividend yield is 3.4%. It has raised its dividend every year since 1993. ALL is the second largest property/casualty insurer and one of the largest life insurers in the country. Its earnings per share have grown at an annual rate of 11% for the last ten years.

*American Express. This company was established in 1850, has paid dividends since 1870, and is a leading global payments network and travel firm. The stock is down from  $65 in May 2007 to its recent low of $40, is currently around $51, where it is selling at 14 times earnings, with a 1.5% yield. It has raised its dividend in each of the last six years. Earnings per share have grown at an annual rate of 9.5% for the last ten years. It has had very good insider buying lately.

*Eli Lilly sells pharmaceutical products in 140 countries. It has paid dividends since 1885. LLY is down from a 2000 high of $109 a share to a low of $47. It is currently around $50. The P/E is 18 and the dividend yield is 3.8%. Dividends have been increased for 41 years in a row. Earnings per share have grown at an annual rate of 8.5% for the last ten years.

*Genuine Parts is a national distributor of automotive parts. It has paid dividends every year since 1949 and the dividend has been increased for 52 years in a row. The stock is down from a high of $51 to a recent selling climax low of $39. The current P/E is 14 times earnings and the current yield is 3.8%. Earnings per share have grown at annual rate of 4% for the last 10 years, but are expected to grow at 9% a year for the next several years. GPC has had positive insider buying.

Cintas distributes uniforms through its rental division. The stock is down from a 2002 high of $56 to a recent selling climax low of $28. That is 50% off. It is currently selling at 13 times earnings, with a 1.8% yield. Earnings per share have grown at an annual rate of 13.5% for the last ten years and are expected to grow at a 9% rate for the next several years. Dividends have been increased every year for last 25 years.

*3M Company is a diversified manufacturer. It sells more than 50,000 products in over 200 countries. It is a component of the Dow Jones Industrial Average. The P/E is 15 and MMM yields 2.4%. It had a buying climax high at $97 and a recent selling climax low at $73. It is currently around $78. Earnings per share have grown at an annual rate of 10% for the last ten years and are expected to grow at 6% a year for the next few years. 3M has raised its dividend for 50 years in a row.

*Verizon Communications is down from an all-time high of $69 in 1999. It just had a selling climax at $34 and is selling at 19 times earnings, with a 4.9% yield. The company has increased its earnings per share at a modest rate of 3% for the last ten years, but that is expected to improve in the next few years.

*Sunoco is a leading domestic oil refiner. It also markets gasoline in 23 states. Rising crude oil prices caused a dramatic increase in per-share earnings from $2.16 in 2003 to an estimated $7.00 this year. The stock made its all-time high of $97 in early 2006 and moved down to a selling climax low of $48. It has since moved up to $56.

Whole Foods Markets is the largest natural and organic foods grocer in the United States, with 186 stores in 31 states. It was a spectacular performer from 1991 to December 2005, as it rose from a low of $7 to a high of $79. After that the stock had a selling climax low of $30 last week. The drop in the price came after earnings per share fell from a record $1.41 in 2006 to $1.29 last year. Growth is expected to resume in the next few years. The stock was wildly overpriced at the high and is down to a much more modest 22 times earnings. The yield is about 2.5%.

As we have noted before, bear markets usually work out very well for those savvy investors who dollar-cost average and reinvest their dividends. They provide opportunities to buy stocks that are “on sale” and will offer the chance for above average returns down the road.