YOU never know when a market hits bottom until well after the fact, but there have been a series of hints over the past few weeks that stock market investors may be flirting with one.
For one thing, volatility is easing. The Chicago Board Options Exchange Volatility Index , or VIX, is down about 8 per cent for the month and around 38 per cent below its 2008 peak hit last month.
A series of sentiment and flow indicators have also suggested this month that, while major investors remain very gloomy about the world around them, they are not getting much gloomier. On Thursday, Reuters asset allocation polls showed that, though leading investment houses continued to hold minimal levels of stocks in their portfolios, they had not reduced exposure this month.
The polls of 45 firms across the world showed equities rose a statistically insignificant 0.1 per cent month-on-month in an average balanced portfolio. Allocations were still well below the roughly 60 per cent long-term average for stocks, but they had levelled. This picture of gloomy- but-not-gloomier investors also emerged from other monthly surveys. State Street's investor confidence index for the month hit its lowest level in its more than 10-year history. But the month-on-month decline was a fraction of what was seen the previous month.
The custodian bank, which compiles its index from the buying and selling patterns of its clients, said that institutional investors were not reacting as strongly to deteriorating economic fundamentals as they had been.
'This month's readings provide a measure of relief,' index co-developer Ken Froot said.
Also gloomy, but with the odd shaft of light, was Merrill Lynch's monthly poll of some 180 fund managers across the world, released last Wednesday.
Although the poll showed investors currently believe the global economy is in recession and it is not going to come out of it for some time, there were signs of asset allocation shifts reflecting stronger risk appetite.
The percentage of fund managers who underweight equities dropped to 54 per cent from 62 per cent, for example, and a run on emerging market equities appeared to have levelled off with 30 per cent underweight versus 36 a month earlier.
Overall, Merrill's risk and liquidity indicator, drawn from the poll's findings, improved slightly. All this may be small beer, but it fits with an increasing number of investors who are arguing that, after falls of more than 50 per cent on many stock markets over the past 18 months, there are bargains out there.
Fortis Investments said this week that one of its tactical funds was moving back into equities and high-yield bonds in part because of value.
Templeton Asset Management's emerging markets funds are betting on a market recovery early next year, with MSCI's benchmark emerging market equity index having lost almost 60 per cent this year.
'Emerging markets have gone very far down and are now back to levels we saw in 2003. We think all these (government stimulus) programmes will start to have an impact in the early part of next year and then we will see a rebound,' said emerging markets guru and Templeton executive chairman Mark Mobius.
This siren song has been heard before, of course, and there is nothing to say that the signs of a levelling off and even renewed investor appetite will automatically lead to an eventual bounce in equities.
The bear market that began last year has already had a number of bounces, including a more than 20 per cent rise between the end of October and beginning of November for the MSCI all-country world stock index .
As analysts point out, bottoming out after steep market falls is a process rather than a specific event. Although in retrospect a bottom price can be identified, it tends not to be spotted at the time. From a process standpoint, the bottom of the last bear market, in 2002-3, came over a roughly five-month period. -- Reuters
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