By: Larry MacDonald

“Stocks are huge bargains, relative to all other asset classes …. U.S. stocks now trade at 13x forward earnings for an almost 8% earnings yield, while 10-year treasuries yield just 4%, making equities the best bargain in more than 60 years,” write Trapeze Asset Management in their latest investment letter. Corporations have excellent balance sheets too, adds the Toronto-based investment counselor/portfolio management firm.

Besides, “history also shows that even from a time standpoint both the bear and the economic downturn are getting into late innings,” continues Trapeze. “The markets topped out almost a year ago. But bear markets are relatively short-lived compared to bulls. The average duration of bear markets over the last 50 years has been 8 months. …According to Ned Davis Research, on average, bear markets bottom 4½ months before recessions end and several months before earnings trough.”

There is evidence that a bottom has been reached. Notes Trapeze: “Pessimism is rampant… Cash on the sidelines is a record $8.5 trillion, over 20% of all U.S. household assets …. Short interest is at record highs (18.1 billion shares at the end of June)…”

“Contrary indicators support a bottoming market. According to Merrill Lynch’s monthly survey, institutional investors are at a record underweight stocks and overweight cash. The put/call ratio … is high. There is a record number of new lows (1,304 NYSE new lows on July 15 vs. only 19 new highs), reflecting severe pessimism. The Volatility Index recently got through a high of 30. Investment advisory services are net bearish and corporate insiders, the ultimate contrarians, have stepped up their buying relative to selling, a very bullish indicator. New issues are at 2001 lows.”

“… market psychology has been as ugly as it gets and investors have been dumping small cap stocks, regardless of fundamentals. According to Ned Davis Research, small caps begin to outperform large caps 4 months before recessions end. A clear opportunity to any sensible investor … our energy holdings are at outstandingly low valuations. You had better believe big cap energy, which is having trouble reinvesting its outsized earnings, is looking at cheaper and faster‐growing small cap energy for investment opportunity.”