“For the short term, possibly the most notable data point is the 10 day average of the Arms Index. This index measures the number of stocks advancing in prices versus the number of declining issues in conjunction with the up/down volume. Over the years, this indicator has had an amazingly good track record of determining significant market bottoms and, as a result, great buying opportunities. Simply put, it finds selling panic bottoms. Readings above 1.50 have been the key points to watch. In the last 21 years, the index has surpassed that level only five times. The dates are Oct. ’87, Oct. ’97, March ’03, March ’04 and March ’07. The current reading is 1.68. Out of the five times noted above ONLY TWO, Oct. ’87 and March ’07, showed higher readings than we have today.

Investor sentiment, a contrary indicator in our opinion, has also turned excessively bearish. The American Association of Individual Investors poll is showing 55% bearish and only 25% bullish resulting in a 218% Bear:Bull ratio. That is the highest level of bearish sentiment in over two years and close to the levels that marked the market bottom in March of 2003. Need we say more?

The IBES valuation model compares the 12 month forward consensus earnings yield to the 10 year treasury yield. Currently Street consensus is earnings of $102.71 for the SPX resulting in an earnings yield of 7.29% versus 3.81% for the 10 year. This calculation suggests that the SPX is currently UNDERVALUED by 47.7% when compared to the 10 year. Of particular note is the fact that this model is saying stocks are at the lowest valuation level since 1980. Yes, that includes that 2003 market bottom following the burst of the internet bubble.”