THE BLOG
03/07/2009 03:57 pm ET | Updated May 25, 2011

Up Next: The Obama Bounce?

All of a sudden, our president is being blamed for the selloff in share prices.

Yesterday, for example, the Wall Street Journal published an editorial by Michael Boskin, former chairman of the Council of Economic Advisers under George H.W. Bush, claiming that "Obama's Radicalism Is Killing the Dow." In a Bloomberg News report, "Obama Bear Market' Punishes Investors as Dow Slumps," a money manager attributed the selloff to uncertainty stemming from the Administration's efforts to turn things around.

As usual, the alleged experts don't have any idea what they are talking about.

For one thing, the current bear market began long before Barack Obama assumed the reins of power. Since hitting its all-time high in October 2007, the S&P 500 index has fallen by more than half, with 80 percent of those losses occurring before the January inauguration.

More important, still, are the real reasons behind the sell-off. These include the bursting of history's biggest housing bubble, which triggered a shockwave of wealth destruction that has wreaked widespread havoc throughout the economy, as well as the unraveling of a multi-trillion-dollar financial house of cards built on greed, ignorance, and fraud.

Throw in the fact that stock prices had been supported by earnings and expectations about the future that had little basis in reality and it's not hard to see why the bears have been in control during the past year-and-a-half or so.

Indeed, on valuations alone, it is easy to make the case that there is plenty more downside to come. During the similarly turbulent times of the past, including the Great Depression, World War II, the late-1970s era of stagflation, and the twin-recessions of the early-1980s, the ratio of share prices to the aggregate earnings of companies included in the S&P 500 during the prior 12-months fell to the mid-to-upper single digits before another bull market began.

Right now, in contrast, the P/E ratio of the bellwether index is around 12. Assuming that we've seen the worst as far as the economy and corporate profits are concerned -- though there are lots of reasons to believe otherwise -- stocks could still fall another 50 percent before they would represent a true "buying opportunity."

To be sure, no market moves in a straight line. Even during the period from 1929 to 1932, when share prices lost 90 percent of their value, there were six double-digit-percentage countertrend moves along the way. These included a five-month, 52 percent rally in the wake of the Great Crash, as well as a nine-week, 29% gain in early-1932, amid the depths of the Depression.

In fact, an expanding array of technical and sentiment indicators suggests that a short-term bottom is likely at hand.

Bespoke Investment Group recently noted, for example, that a weekly poll by the American Association of Individual Investors (AAII) showed that investors "are now at their most bearish levels in the history of the survey." For contrarians, that is a bullish sign, indicating that pessimism -- and the selling that goes along with it -- is somewhat overdone, at least in the short run.

My own research on the deviation between stock prices and their longer-term moving averages, which can help gauge the "intensity" of a move, reveals that the differential has reached a level not seen since mid-November, after which the market jumped 19 percent in five days. Prior to that, the last time we saw such a rubber band-like divergence was during the 1930s -- before one of those rebounds I referred to earlier.

What this means, of course, is that when the stock market does have another one of its dead cat bounces, it likely won't be because of anything our president has done.

But that won't stop another group of "experts" from claiming otherwise.