ETF Expert

It may be a short-lived rally in March. It may only be a bear market rally of 20%-25% off of the lows. Yet the list of reasons why stocks might actually go up keeps growing.

Consider:

1. Contrarian. Market sentiment is so bad, the American Association of Individual Investors reports that 57% of investors are pessimistic on stocks (bearish) and a mere 22% reported that they were optimistic (bullish). Percentages greater than 55% bearish and/or percentages lower than 25% bullish typically go hand-in-hand with a so-called "bottoming process."

2. Fundamental. USA Today reported the current S&P 500 P-E Ratio is at 10, versus the 110-year historical average P-E ratio of 16. If these numbers were to hold, you'd have a market that was 50%+ undervalued, putting a fairer value of the S&P 500 at roughly 1040.

3. Technical. Although the broad market and most market segments are hitting new lows, the number of individual stocks hitting new lows has been quietly decreasing. In October, roughly 3000 stocks hit new lows. The new November lows had only about 1500. And more recently, the number of new lows on March 4 was closer to 1000. Decreasing breadth of new lows would be similar to seeing fewer and fewer homes selling for reduced prices, indicating a greater likelihood of a floor.

4. Political. On March 12, Congress is finallllllllllllllllly taking a look at mark-to-market accounting on illiquid assets. Some may shout, "Halleluiah."

5. Historical. Money market funds hold cash in the $9 trillion+ range, exceeding 40% of the stock market value. This is an all-time high for cash on the sidelines. Historically, cash levels max out as markets find their collective bottoms.

ETF investors might take a look at yet another sign of "bottoming," and that's the increasing demand for exchange-traded funds. From September of 2008 to March of 2009, the number of foreign and domestic shares of ETF has increased. Values have declined, but share ownership is rising.

Granted, one can argue that this merely reflects mutual fund money flowing into ETF coffers. And if we crunched those numbers, surely a greater number of dollars moving into money market accounts has to mean that share ownership growth is more a reflection of ETF acceptance than of a "coming bull market."

Nevertheless, the mere fact that investors are using ETFs means that the markets have not likely been dealt an apocalyptic-like death blow. The markets should, in fact, recover.

When? Well… that's the million-dollar question (pun intended). From my vantage point, only Tech (XLK) and Telecom (IYZ) have held above their sector lows in November… and that too may just be a matter of hours. (Still, valuations and "cash on hand" make tech attractive.)

Yet there's another reason that should give investors reason to buy long ETFs, either for a snap-back rally to trade or for the proverbial "long-term." Markets begin climbing off the mat at a recession's lowest ebb… typically, the mid-point.

So let's consider the following scenario. The recession lasts, not just for all of 2009, but all of 2010. 3 solid years of recessionary data that includes 2008, 2009 and 2010. Even from this perspective, the mid-point of the lengthy economic malaise would be June 30, 2009.

Indeed, a March/April rally might be short-lived, but that may prove to be a trader's delight. A longer-term bull market move could become evident in the summertime.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.