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June 1, 2010 Tuesday FIRST EDITION
SECTION: MONEY; Pg. 1B
LENGTH: 417 words
HEADLINE: Investors’ high anxiety may mean it’s time to buy; Sky-high fear index tends to precede market rebound
BYLINE: Adam Shell
The best time to invest in stocks is when investors are scared, the market feels like it is never going to stop going down, and fear has trumped greed. So after some of the most volatile and panic-inducing market roller-coaster rides in Wall Street history — and the worst May performance since 1962 — it begs the question: Is the worst of the tumult over?
With the Standard & Poor’s 500 off as much as 12.3% from its high, predictions of more mayhem have given way to chatter about a rebound.
Carmine Grigoli, chief investment strategist at Mizuho Securities USA, insists the stage is set for a rebound. He says stocks have already endured a lot of selling and investors have gotten too pessimistic.
Those factors suggest that much of the downturn — despite ongoing fears that debt problems in Europe could dampen the global economic recovery or even spark a new crisis — has been fear-driven.
He points to the spike in the so-called fear index, or VIX. The VIX measures how nervous investors are and how much they are willing to pay for downside protection, or insurance, in case stock prices fall.
At the height of the stock drop, the VIX topped 40, which has occurred only five times in the past 25 years, Grigoli says. It did so during the financial crisis in 2008, after the 9/11 terror attacks, at the height of the dot-com bubble, in the summer of 1998 during the Russian financial crisis, and around the October 1987 stock crash.
Rallies often follow fear spikes.
“Such elevated (VIX) readings are characteristic of the emotional selling that occurs in late stages of a market decline,” Grigoli says. Stock prices, on average, have risen 11.7% and 25.6% six and 12 months after periods when the VIX tops 40.
Grigoli is sticking by his 2010 target of 1325 for the S&P 500, or a gain of almost 22% from Friday’s close of 1089.41.
Don Luskin, chief investment officer at Trend Macrolytics, is less bullish. He says the “stench of panic is off,” but says stocks will have a tough time eclipsing their April highs. “It is expecting a lot to expect any big upside in stocks, especially when we just came off an 80% rally,” he says.
But he doesn’t expect a big fall, either: “Huge positive forces and huge negative forces are canceling each other out.”
On the positive side: Corporate profit is growing at a 30% annual clip, something that’s happened only six times in the past 60 years. Stocks are not expensive, either. The S&P 500 has a price-to-earnings ratio of 13, vs. the long-term average P-E of 15.
LOAD-DATE: June 1, 2010