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3 Reasons Why Investors Should Be Optimistic

March 21, 2008 – by Richard Band

You and I know that the folks on CNBC or CNN are going to remain negative long after a market bottom and well into the subsequent recovery.  So I look for indicators that will take me away from the emotions of the moment and show me objective, concrete signs that the market has bottomed and is ready to turn around.

There are no guarantees, of course, but here are three reasons why I’m betting that the worst may be over:

1) The Chicago Board Options Exchange put/call ratio is a good measure of investor sentiment.  When the put/call ratio is high, a lot of people are buying puts; they are betting that the stock market will go down.  But that’s typically what happens at a market low or near a market low. 

This ratio, even after this week’s rally, is at an extremely low reading, in fact, it’s nearly the most extreme that the put/call ratio has ever reached in its history.  So we’re looking at extreme pessimism on the part of the speculators who buy options.  But typically, these Wrong-Way Corrigans are most negative when we’re very close to a market bottom. So if history holds, and they’re on the wrong side of that bet, as they usually are, that’s one reason for optimism. 

2)  The New York Stock Exchange has about 3,500 stocks traded every day, and another sign of sentiment is the number of new highs or new lows in those stocks.  Fewer individual stocks are making new lows even as the market indexes have been scraping new bottoms.  More and more stocks are refusing to go down any further.  This is typically what will happen at a major market bottom.  It’s encouraging that this is happening even as people are very, very negative on the market.  So there’s another objective sign that things may be getting better. 

3) The Bear Stearns (BSC) crisis is also a very typical phenomenon at an important market low.  As so often happens in a crisis of confidence like we’re now experiencing, some big institution will run into trouble and throw everyone into a panic, including the authorities in Washington. Let’s face it, Fed Chairman Ben Bernanke is as upset about what’s happening as you and I are as investors. This kind of crisis—the collapse of a major brokerage that looked solid only days before it went under—galvanizes the authorities to do something to restore confidence.  After the rally this week, it looks like an important level of confidence has been restored. 

Add it all up, and I’m seeing a number of very important signals that have marked turning points in the past. While things could certainly get worse, and we still don’t know the depth of the problems in the financial sector, there’s good reason to be optimistic. 

One last indicator I like to look for is a big up day in the market.  By “big up day,” I don’t just mean a big numerical rally in the Dow or the S&P 500.  What I’m looking for is a day where upside volume on the NYSE exceeds downsize volume by well over nine-to-one. That’s almost always been an important turning point in the past when the volume of advancing stocks exceeds the trading volume of the declining stocks by nine to one margin.  We had that on Tuesday after the Fed’s latest rate cut, and again just last week. So that’s two of those readings within a short space of time, and yet another reason why I’m feeling good about my bet that the worst may be over. 

For more insight into this week’s market action, listen in on my audio conference. In it, I reveal what the media isn’t telling you about Bear Stearns, Lehman Brothers and the other big financial stocks; why the latest Fed rate cut isn’t quite what it seems; how you can safely capture five years of profits in the next 21 months; three stocks to buy now and MORE! Click here now for immediate access.

So What Do You Do Now? 

While we’re not out of the danger zone quite yet, it’s not too early to think about getting off the sidelines and back in the game.  For starters, I’m urging my subscribers at Profitable Investing to purchase high-dividend stocks that will allow us to participate on the upside, and give us a nice margin of safety if the signals I’m reading above aren’t 100% accurate. 

In particular, I like the Master Limited Partnerships, or MLPs.  My three favorites offer yields of over 7% and big capital gains potential to boot.  It’s an unbeatable combination for the wild and wooly market ahead. 

One of the anomalies in the market today is that even with the low interest rates we’re dealing with and even though the Fed’s been cutting interest rates, yields on certain very high quality income investments have remained quite generous.  In particular, master limited partnerships are paying well over 7% in many cases.  If you’re not familiar with them, MLPs are tax-sheltered investments that are traded on the major stock market exchanges, so you have good liquidity, and it’s easy to get in and out of them if necessary. 

My three favorite MLPs all own pipelines that transport natural gas, refined products and crude oil.  So it’s very similar to owning a utility—very stable, low volatility and very attractive in down markets or when there are recession fears.  And as I noted earlier, these MLPs are trading at yields of 7% and higher.    

If I could pick only one, I’d choose the one I’ve been buying rather heavily for my own account in the last few days: Energy Transfer Partners (ETP).  ETP is yielding 7.2% at today’s prices, and it is growing faster than the typical pipeline partnership.  That means you could be looking at annual increases in your cash payouts of something like 7%-8% over the next three to five years. So you’ve got an inflation-beating yield up front, and you’ve also got these nice dividend increases that should be coming your way in the next few years.  That would be my number-one pick. 

Speaking of utility stocks, there are some very good utility stocks that are still quite solid. Progress Energy (PGN) would be a good one in here, paying a little more than 5% in dividends.  Progress and my other favorite utilities are companies that are going to keep paying their dividends, come hell or high water. This is a good place to be doing some buying at current levels. 

These are just two of a number of recommendations I’m giving my subscribers at Profitable Investing.   In addition to utilities and MLPs, I’m also pulling the trigger on other stocks and ETFs that are uniquely suited to do well in the weeks and months ahead.  I’ll be happy to share the names of all my recommended investments when you give my Profitable Investing service a try.

As the past few month shave shown, investing can be a tough game.  The market never goes straight up, but if you remain focused on the long run, you’re going to do just fine.  And Richard Band, editor of Profitable Investing, believes the odds are quite good that we’re going to look back on a bountiful year by the time December 31st rolls around. Don’t miss out on the profits—accept a risk-free trial subscription by clicking here now.