Michael Brush: Now’s the time to buy stocks — the stars are aligned

Can anyone “call” a stock market bottom? Nope. But by tracking the right signals, you can get close. Three “stars” I follow to spot market turns say we’re just about there. When a selloff is peaking, these three signals typically pop up:

Extremely negative investor sentiment.

Extreme media bearishness.

Robust insider bullishness.

In short, when those in the know (insiders) are quite bullish, while those prone to excessive emotion and crowd behavior are gloomy, the stars have aligned, telling us to aggressively deploy cash.

To be sure, we could see another push down in stocks. Selloffs are often punctuated by a giant drop on large volume to clear the air, often at the open. This is what we saw last August. We haven’t seen this yet.

The media are quite bearish

Scare stories and gloom-and-doom headlines abound. We hear that Europe is going to “fall apart” because of the “immigrant crisis.” Or that we’re about to go through 2008 all over again. Yikes. Many of the gloom-and-doom arguments are simply irrational.

Meanwhile, insiders are getting more bullish

A good way to measure insider sentiment is to track the ratio of insider selling to buying. A declining number here signals greater bullishness among insiders. This ratio has been steadily declining — turning more bullish — since the market selloff started in December.

No recession at hand

Why are insiders so bullish in the pullback? Probably because from their front-row seats on the economy, they see trends that confirm what several strategists are telling us: The U.S. economy is not going into recession. If global economic growth does get much worse, central banks in Europe and Asia have room to increase their stimulus, says J.P. Morgan Chase economist David Hensley. Meanwhile, in the U.S., hawkish Federal Reserve officials have spooked the markets by suggesting 2016 will bring four more rate increases. But that is unlikely, says Deutsche Bank strategist David Bianco, given the tone of the stock market selloff.

Stocks to buy

If you are going to make an aggressive contrarian bet on stocks now, it makes sense to go all the way and skip defensive areas like consumer staples. Instead, go with the groups that have been crushed the most. These include:

In biotech, you should consider Incyte Corp. INCY, +4.35% which I have suggest for years in my stock newsletter Brush Up on Stocks. Incyte looks quite interesting in the current pullback, because it should get a lift from positive results in cancer-drug trials this year. Also consider Amgen Inc. AMGN, +2.30% which should get a boost from positive study results in 2016.

In retail, consider American Eagle Outfitters Inc. AEO, +2.63% where CEO Jay Schottenstein was recently a big buyer of Eagle shares. American Eagle has a huge cash position so it is relatively safe. It pays a 3.4% yield. Eagle’s Aerie lingerie brand is challenging Victoria’s Secret, a division of L Brands Inc. LB, -2.54%

Among names hit by plummeting oil prices, consider Exxon Mobil Corp. XOM, +1.20%  which has solid cash flow and financial strength backing its 3.9% dividend yield. Also consider J.P. Morgan Chase & Co. JPM, +1.51%...

Buybacks to the rescue

If we’re near a bottom in the selloff, it’s worth asking: What might turn things around? No one knows for sure. But it could be as simple as more stock buybacks. Thus, a “good rally” in February is possible as companies start up their buyback programs again.

(source: MarketWatch)