One little drop of optimism could be all the market needs

People were selling possessions to speculate in the tulip market. One sailor ate a bulb with herring, thinking it an onion. It would have paid his ship's crew for 12 months.

Some tulip traders started selling tulips that had only just been planted. Others sold bulbs they intended to plant. Gotta love those Futures traders. They called it "wind trade" at the time, because that's all the tangible assets you had, thin air.

There has been a lot written about bubbles, and how to spot them. Here are the lessons from 400 years ago. How to spot a bubble:

Everybody is making gains.

People believe the passion for stocks will last forever.

Your ordinary industry is neglected.

Tangible assets are converted to cash to speculate in shares. (Equity mate.)

Other asset classes are deserted.

Luxuries of every sort rise in price.

Assets are bought to sell, not bought for their return.

Now let's turn this on its head and see if we aren't in the opposite of a bubble, A period in the stock market when everyone is undervaluing everything, a stock market "bust" maybe. Let's see if we are being too bearish. If so then the following should be happening:

Nobody is making money. Tick.

People believe long-term investment is over forever. Tick.

Everybody is concentrating on keeping their jobs. Tick.

Everyone is trying to pay down their debts. Tick.

Other asset classes are swamped (term deposits). Tick.

Luxuries of every sort fall in price (discretionary retailing in a hole). Tick.

Assets are bought for their return not to sell (income stocks favoured). Tick.

All a bit simple, but there are other factors that suggest we are closer to a bottom than a top. For instance:

There is a lot of cash ready to invest.

The yield gap favours equities over bonds. Yields are historically high. Gross equity yields average 7 per cent against the 10-year bond yield at 4.16 per cent.

Equities are historically cheap. On 10.5 times forward PE. The long term average is 37 per cent higher at 14.4 times with peaks of 20 times.

Balance sheets are historically strong.

So what's holding us back? The answer isn't price, the price is right, the answer is "Risk". We have spent the last 4? years getting a salutary lesson in risk and its consequences, including volatility, uncertainty, insecurity, fear, smashed expectations, lost time and ultimately, all that really matters, capital losses. We are fed up with losing money basically.

But even in the 82 per cent fall in the Japanese sharemarket in the past 22 years there have been seven bull markets averaging 58 per cent and lasting on average one year and four months each. Periods when the risk aversion eased enough for the herd to go back in for a trade. It can happen and when it comes to price the stage is set.

For equities to rally, we need a catalyst, anything that turns the focus away from fear and risk to greed, or more likely, the need for a return. It could be a bit of blue sky on Europe after the Greek deal. It could be the pitiful returns and over-pricing of fixed-interest instruments and other havens such as gold (zero return) and the mattress (zero return). It could be a rally for no reason that causes a stampede.

But more likely it is going to be the cash busting out of its seams. Consumer, investor and corporate balance sheets are all being rebuilt. The process may not be complete, but there is a lot of money ready to go. JPMorgan just announced a $US15 billion ($A14.3 billion) share buyback and an increased dividend. It has had enough of sitting around and has decided to put its money to work. Sound like anyone you know?

A waterfall starts with one drop. Was that it?