Time to Buy Stocks

Among the quantitative indicators I follow, four of them are suggesting that now is a good time to buy stocks.

Election Year Ahead

The first of these indicators is the calendar. This is the pre-election year of the presidential cycle. Let's take a look at how the S&P 500 has fared in past pre-election years since 1950.

In the table below, the "maximum year-to-date gain" shows the index's high point of the year, which obviously coincides with the "high of year date." The "year gain" is how the S&P performed for the year as of Dec. 31.

As you can see, the S&P 500 finished with at least a 2% gain in all pre-election years. Right now, the index is down for the year, which suggests more upside to come. In all pre-election years, the S&P was up at least 9.96% at one point. So far this year, the S&P 500's peak gain was 3.05%, which also suggests more upside to come. Also, in every instance, the high of the year came on April 28 or later, whereas 2007's year-to-date high was reached on Feb. 22, leaving us plenty of time to see additional gains.

Year	High of Year Date	Maximum YTD gain	Year Gain
1951	Oct. 15	16.74%	16.35%
1955	Nov. 14	28.99%	26.40%
1959	Aug. 3	9.96%	8.48%
1963	Dec. 31	19.43%	18.89%
1967	Sept. 25	22.38%	20.09%
1971	April 28	14.60%	10.79%
1975	July 15	40.87%	31.55%
1979	Oct. 5	16.70%	12.31%
1983	Oct. 10	22.76%	17.27%
1987	Aug. 25	39.53%	2.03%
1991	Dec. 31	26.68%	26.31%
1995	Dec. 14	35.62%	34.11%
1999	Dec. 30	19.84%	19.53%
2003	Dec. 31	27.15%	26.38%
2007	?	?	?
Average		24.38%	19.32%
Median		22.57%	19.21%
Source: Yahoo! Finance

Both the average and median returns for the entire pre-election-year sample were more than 19%. This offers a nice segue to the second indicator: polls whose respondents are not excessively bullish.

Checking the Polls

The following four polls, taken at the end of last year, are the most prominent ones that I have come across in my research.

• Business Week polled no fewer than 80 strategists for their market forecasts. The most optimistic of the 80 predicted a 15.6% gain in the S&P 500 in 2007.
• Ticker Sense polled 25 financial bloggers. The biggest bull among them called for a 15.2% gain in 2007.
• Bloomberg surveyed a number of equity analysts on a weekly basis for their S&P 500 price forecasts. Out of 14 analysts, the highest prediction was for a 14.9% return.
• Barron's polled nine market strategists from the big Wall Street firms for their predictions for the year. The most optimistic of the nine predicted a 12.8% return.

Of more than 120 people polled, the most optimistic called for a 15.6% gain in the S&P 500 in 2007.

Many people have pointed out that most of the respondents are bullish, which is indeed true. However, virtually nobody has pointed out the other truth: The respondents aren't excessively bullish. Since 1950, the S&P 500 has been more likely to gain 20% for the year than to be down anything for the year.

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At the time of publication, Debevec had no positions in the stocks mentioned, although positions may change at any time.

James Debevec II is the portfolio manager of Absolute Value Fund, LLLP. Debevec is also a Chartered Financial Analyst Charterholder and a Chartered Market Technician. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Debevec appreciates your feedback; click here to send him an email.