Timing the rise of the Phoenix

June 13, 2008

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This article, by Cam Hui, is about watching for a market bottom, with a long-term perspective, and buying "Phoenix stocks" which can yield very substantial returns. He believes we are close.

Timing the rise of the Phoenix (and market)

Excerpt: Despite my recent bearish tone on I am no permabear. In fact, I am waiting for signs of a market bottom in order to buy Phoenix stocks, a strategy that has yielded some eye-popping returns in the past. Here are some of the different indicators of market direction I am looking at in watching for signs of a market bottom and their current readings:

Valuation – neutral/slightly bullish
Investor psychology – bearish
Economic – bullish
Technical – waiting for a capitulation bottom

Valuation: Neutral to mildly bullish
As I write this, the 10 year yield is about 4.2% and the S&P 500 is trading at 21.8 times reported earnings and 14.6 times forward earnings. In recessions, analysts cannot forecast forward earnings well so we’ll throw out the forward P/E. Using reported earnings and plugging the results into the Fed model, which has well documented problems, the market is slightly undervalued.

One of my other favorite rules of thumb in looking for a bottom is the valuation of the investment banks. The investment banks tend to bottom out at a price to book ratio of 1 during periods of economic stress.