I keep hearing and reading that the market will not bottom until there is maximum fear and capitulation selling.  This is a commonly held view by many investors.  But is it true?

No it is not necessarily.  Bottoms can be marked by capitulation selling but bottoms are as likely, if not more so, to be marked by selling exhaustion.

The VIX is one measurement of fear.  Generally, the higher the VIX, the higher the fear.  Ergo, the VIX should be highest at the maximum point of fear, which should mark the capitulation bottom.

From The Star-Tribune.

Stock purchases by company officers and directors ... is growing evidence that insiders believe their companies have the worst of the recession behind them and their stocks should rise this year, analysts said last week.

Adjusted for inflation, the Dow Jones Industrial Average is at the same level as it was in 1966.  From CrossingWallStreet, via The Big Picture.

Marc Faber has been very bearish on the US stock market.  And though he thinks that the bottom is ultimately lower, he believes that stocks are a good buy for the next decade, and that a near-term rally is in the offing. 

In our never-ending quest to find a bit of good news, we note that consumer credit picked up slightly in January.  From EconomPic.

An intriguing graph from Brad DeLong.

From Curious Capitalist

Myron Scholes, whose Black-Scholes option pricing model provided the intellectual underpinning for modern derivatives markets, thinks one particular derivatives market—that for credit default swaps—is due for a Red Adair style rescue. Or a Fred Adair style rescue.

Markets at times are rational, efficient, information-processing mechanisms which correctly price asset markets.

And at other times, the market is an idiot.

This struck me - as it does every day looking at my screens - reading this article from Bloomberg.

The median price/earnings ratio of stocks in the Russell 2000 on trailing 12 month earnings closed today at 5.9x.  The median PE on forward earnings for 2009 is 8.0x.

For the Russell 1000, the median trailing PE is 7.6x and the forward PE is 9.3x.

For the Russell 3000, the median trailing PE is 6.6x and the forward PE is 8.6x.

For the S&P 500, the median trailing PE is 8.6x and the forward PE is 9.4x.

Valuations are at generational lows.

The question now is do valuations reach lifetime lows?

From Bloomberg

The highest pessimism on record among U.S. investors suggests the S&P 500 will rebound after sinking to a 12-year low this week. The American Association of Individual Investors said 70.27 percent of investors were bearish as of yesterday. That’s the highest reading since the index’s creation in 1987.