2022's Bears Should Give Birth to a Bullish 2023

Are you ready to rumble in 2023? You should be. Pervasive bad news and the finish of a putrid stock market year has made people extremely bearish as we get ready for 2023. Ironically, that is exactly the type of thinking that often launches new bull markets. When everybody who wanted out has already sold, there's usually no place to go but up. Several time-tested indicators are screamingly bullish right now. Let me show the list: Overall equity valuations are nearly as low today as they were during the 2008-2009 Great Recession and the Covid-panic Low of March 2020. We now sit in the sweet spot of the four-year presidential cycle pattern. 2021 was an anomaly. There was a huge run-up that was uncharacteristic. The subsequent selloff and partial fourth-quarter rebound brought us back to almost exactly where it figured to be historically. Third years of Presidential terms have been by far the best statistically. That was true regarding both the magnitude of gains and the percentage of the time the market went up vs. down. Extremely bearish sentiment readings almost always signal the proper point to position for imminent upturns of major proportions. There are always good reasons for people feeling that way as noted above. That never stopped markets from recovering way sooner, and more violently, than most traders expected. Option buyers are very reliable contrary indicators at key market inflection points. Extreme call buying typically signals tops. Huge put buying sprees, following large selloffs, lets us know that better price action is coming soon. Late December 2022, saw the most extreme equity put to call ratio in history. During most of our lifetimes (1942 to present) the S&P 500 only declined in two straight years on three occasions. It took major events to trigger even those rare repeat losses in the 1970s and the early years of the 21st century. Most single-year downers were followed up with multi-year bull runs. Most of the damage inflicted during bear markets occurs quite close to their eventual endings. Since WWII, the first month's recovery periods showed average gains of 14.8%. Three months after the bottom typical rebounds averaged 21%. The window for buying very the nadirs was surprisingly low. The average number of trading days on either side of the final bottom was just 14. The median time to buy dirt cheap was only 11 trading days. That is why it is so important to prepare your portfolio with long positions based on individual attractiveness rather than trying to guess if the bottom is in. The crazy run of profitless growth stocks and the multiple expansion of tech stalwarts like Apple , Microsoft and Oracle over the last decade pushed that category to very overpriced levels. Value-oriented small-cap companies were almost totally ignored. They have experienced some of the most severe price-to-earnings compression in history. Many of my favorite holdings are trading for mid-single-digit P/Es despite posting excellent fundamentals. Many pay well-covered current yields that are higher than ever before. Value outperformed growth in 2022. That trend, coming off historically cheap valuations, is almost certain to continue for a long period. Don't get stuck following talking heads' advice to concentrate on safe and high-quality names only. Those types of shares are set to lag what could be spectacular runs from the underfollowed and under-owned lesser names which were beaten up worse than the large-caps. The year 2023 is destined to see a resurgence in the shares that were unjustifiably punished. P/E expansion is the magic ingredient in creating enormous upturns. It worked for big tech as the market took off in 2021. The new beneficiaries are going to be the companies with great fundamentals and cheap valuations.

2022's Bears Should Give Birth to a Bullish 2023

Here's why I'll be ready to rumble in the new year -- and why you should be, too.

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