Yesterday, I shared the first five reasons why I’m convinced the stock market is going to enjoy a year-end rally.
I’ll concede that most revolved around the sentiment and actions of humans – analysts, consumers, newsletter editors and corporate insiders.
Of course, humans are all inherently flawed and prone to making mistakes. So today, let’s take a look at five irrefutable reasons that can’t be so easily dismissed…
Stocks Are Bargains No Matter How You Slice It[ad#Google Adsense 336×280-IA]As we all know, the easiest way to succeed in investing is to buy low and sell high.
And stocks are definitely “low” based on a variety of valuation metrics, which brings me to my next three reasons the stock market has a good chance of rallying into year’s end…
Reason #6: Free Cash Flow Yields. Based on this measure, stocks are trading in the ninety-fifth percentile of cheapness, according to hedge fund manager, Joel Greenblatt.
He concludes that the extreme valuation could lead to a 15% to 20% rally for stocks over the next year.
Reason #7: Price-to-Earnings Ratios. Today the average stock in the S&P 500 trades at a P/E ratio of just 13.5. That’s 25% below the average P/E ratio of 18 since 1950.
Reason #8: Forward Price-to-Earnings Ratios. Based on next year’s earnings, stocks in the S&P 500 are also about 25% cheaper than average. They currently trade at a forward P/E ratio of 10.2, compared to a long-term average of 13.7 since 1957.
A Volatile Precursor to a Rally
Unless you pulled a Rip Van Winkle for the last couple of months, you’re well aware that volatility’s returned to the market. With a vengeance!
A 300-point swing for the Dow is the norm again. Ironically, though, when volatility spikes, it often signals a tremendous buying opportunity.
Reason #9: Because the VIX Says So. When the VIX Volatility Index (^VIX) rises above 40, the S&P 500 rallies 3.2% over the next three months – and 19% over the next year – according to Bloomberg data.
And guess what? In the third quarter, the VIX surged 160% to hit 42.96.
As James Paulsen, Chief Investment Strategist at Wells Capital Management, says, “A very high VIX level suggests investors have given up, they’re out of the way, and that’s a great entry point.” I concur!
There’s No Better Time Than Now!
The last reason why stocks could rally is simple. Because it’s that time of year.
Reason #10: Seasonality. The fourth quarter is historically the best quarter for stocks.
Over the last 20 years, the S&P 500 is up an average of 4.7% from October to December. And over the last 50 years, the index is up an average of 3.6%.
In terms of the best-performing sectors, consumer discretionary, consumer staples and technology (our main focus at The White Cap Report) lead the way.
Bottom line: Despite lasting more than two years already, the evidence reveals the current bull market isn’t done charging yet. So I suggest you invest accordingly.
Ahead of the tape,
— Louis Basesene[ad#jack p.s.]
Source: Wall Street Daily