By Kate Gibson
NEW YORK (Dow Jones) -- With equities bouncing back after an
initial smack on Thursday -- and Friday's jobs report for January
looming -- the bear market is likely at or near a level where
history would dictate investors step back in.
"Investing at lows, assuming you can identify them, is a very
rewarding proposition," said David Krein, senior director,
institutional markets, Dow Jones Indexes.
On Thursday, consumer discretionary, information technology and
financials led a late-morning turnaround, with one analyst pointing
to a rumor of a possible bidder for Bank of America Corp. (BAC) and
chatter the SEC might scrap or modify its mark-to-market rules as
helping lift equities.
"These rumors show that there are willing participants out there
who want to get back into the market, most are waiting but if say
for example the administration can come up with a decent stimulus
plan the market may respond and we could get a very nice rally
despite the fact that the current situation is quite negative,"
said Robert Pavlik, chief market strategist, Banyan Partners
LLC.
After climbing about 125 points, the Dow Jones Industrial
Average (DJI) was up 71.28 points at 8,027.94. The S&P 500
(SPX) added 10.56 points to 842.79, and the Nasdaq Composite (RIXF)
rose 23.63 points to 1,538.68.
In looking at the current drawdown period -- the decline in
value of the Dow Jones Wilshire 5000 from its peak to its trough --
the most recent drop is about 41.5%. That's less than the 44.12%
drawdown experienced during the 2000 to 2002 bear market, said
Krein.
While only time will tell whether the bottom has been hit, a
40%-plus decline is significant, to the degree historical trends
hold, said Krein.
Timing is everything
"If we happen to be at the bottom now, maybe history will hold
and maybe it won't, but it still takes a multiple of the period of
decline to recovery. It's that buildup that investors do not want
to miss," said Krein.
The market took about three and a half years to recover after
the 2002 bear market, yet the market rebounded 14.86% in the year
following the trough date.
"If you expand this out to two or three years, the market has
rebounded 28.28% and 48.29%, respectively," Krein said.
Historically, the recovery takes about twice as long as the
decline. But for those "with the stomach and capital to wade back
in," investing at market lows in the past has translated into gains
of 40% and more for those who buy and then wait out the bounce
back, Krein said.
"If you're a long-term investor, I think stepping in even at
this point in time would be a good move. Economies don't stay weak
forever, so it makes sense to position for a turnaround that we see
happening sometime next year," said Pavlik.
"Everybody is gun shy right now, but look at some of these
fabulous companies -- Caterpillar [Inc.] (CAT) is not going to go
out of business, and it's at a multi-year low. I bought some the
other day, and almost had to hold my nose doing it, but look at its
fundamentals, and the domination of the industry they are in," said
Pavlik.
Investors want to buy on the way down, rather than trying to
chase on the way back up, and it's near-impossible to know exactly
when the bottom is going to hit. As Pavlik put it, "you don't want
to catch a falling knife."