MARKETS SPECTATOR: Basement bargains

US markets have been hit hard by concerns over the fiscal cliff but strategists are much more optimistic on what 2013 will bring.

Following the re-election of President Obama, US stocks have pulled back quite substantially as fears over the looming fiscal cliff take hold.

However, the combination of declining prices and rising profits has delivered some very attractive valuations for the S&P 500 index. In fact, the S&P 500’s price/earnings ratio is now below the average of any bull market since the 1980s, when Ronald Reagan occupied the White House.

The pullback that started with a weaker-than-expected third quarter earnings season has meant expectations are now at rock bottom as few people have confidence in a deal being done between Congress and President Obama. However, when expectations are low the market is already pricing in a lot of the negativity.

Hence it’s not uncommon at all to see strong moves to the upside as market participants suddenly realise that it’s not as bad as initially feared.

Despite the recent falls, strategists are very optimistic for 2013, with the average forecasts predicting a rally of 17 per cent to an S&P 500 record of 1585.

In other encouraging news, the recent behaviour of corporate insiders suggests we are nearing a low point for stocks. At the end of last week, the sell-to-buy ratio was 1.58 to 1, which when compared to the average of 3.4 to 1, is less than half.

Interestingly, at the recent bull market high the ratio stood at 6.86 to 1, meaning significantly more insiders were selling stock than buying. Now, the current reading tells us that insiders are significantly more optimistic about their companies’ shares than they were only a few months ago.

Since the beginning of the bull market in March 2009, there have only been three scenarios where the ratio has been lower than it is currently. And all three came within a few weeks of a significant trough in markets.

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