An update by Leon Tuey... (A MUST read)

Conditions are ripe for a Tsunami rally. On Thursday, November 20, the popular market averages plunged to new lows, which caused another wave of panic. Clearly, investors remain mesmerized by the short-term movements of the market averages, and not on things that really matter. At the risk of sounding like a broken record, the things that really matter are the monetary, economic, valuation, and sentiment factors. These are the factors that really drive the market, and they continue to indicate that a low-risk, extremely high-reward juncture has been reached. At this juncture, we can’t stress strongly enough that investors should focus on these important market factors and to ignore the noise.

Monetary
As mentioned, the unprecedented monetary growth and co-operation of the world’s central banks will help to turn the economy
around. Clearly, that’s their goal.

Economic
Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to
recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic
downturn.

Valuation
By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it’s 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.

Sentiment
Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in.

Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.

Finally, our work shows clearly that investors should abandon bonds and buy stocks, as stocks will outperform bonds in the months ahead.

In conclusion, conditions are in place for a monster rally. There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity.