In our last Market Commentary, dated August 10th, we said that the 17.6 percent decline in the DJIA from its May 5th recovery high had become exhausted and that a “base-building” process would probably begin. Base-building is a process of price stabilization that occurs after a significant price decline where a trading range is established, often by volatile up and down price movements.

After yesterday’s 400 point swing in the Dow Jones Industrial Average, we now believe that the duration of the base-building process is half completed. Perhaps more importantly, we have observed that most stocks are no longer making new 52-week lows and that the remainder of the base-building process should occur at higher price levels. Furthermore, we would expect that the conclusion of this period would be marked by a sharp rally that would move stock prices out of the trading range that has been established in recent weeks and that will continue to be formed in the weeks ahead.

The argument for higher stock prices in the immediate future is supported by the extremely low valuations that investors have placed on earnings and the generous dividend yields being offered by many companies with sound balance sheets. As a result of our experience, we are also encouraged by the high level of pessimism and anxiety that permeates the media and investors’ minds. While most investors have been focused on the problems in the European Union, the gyrations of gold prices and our domestic political struggles, we like to find bargains and take ownership of assets that produce goods and services which characterize the world in which we live.