7/13/2011 4:24 PM ET|
Time to buy: Here's what and why
Although the global macroeconomic picture is scary, the forces that drive stock prices higher are surprisingly reassuring. Now is the time to go against the crowd.
Our long economic nightmare has taken a new turn for the worse this week. The U.S. jobs picture remains bleak, debt woes in Europe are getting worse, and American politics is locked in struggle over the debt ceiling. It seems investors are flying blind, with fortunes dependent on the whims of politicians and central bankers.
In response, stocks and other risky assets have tanked. Now we're poised to face another long, hot summer of political intrigue and economic uncertainty -- just as we did last year. Investors, still shellshocked from the market's springtime slump, are taking risk off the table.
It's not just retail investors. Hotshot hedge fund managers are losing money, too -- especially the global macro traders who are supposed to thrive in such an environment. In a recent note to clients, analysts at Standard Chartered pointed out that cash holdings at hedge funds and proprietary trading desks are now higher than at the beginning of the year even though the so-called economic soft patch appears to be fading.
But going with the crowd is rarely the smart trade. Plus, there are fundamental reasons you shouldn't fall victim to the steely chill of fear. No, this isn't a time to sell and hunker down. It's a buying opportunity.
5 reasons to be bullish
First, as I explained in a recent column ("Halftime for the bull market"), the 2-year-old bull market and economic expansion are simply too young to die. The big drivers of growth look ready to accelerate (see "The economy is recovering -- really"). Consumer spending should be bolstered by the fact that debt-service burdens have fallen to levels not seen since the mid-1990s, job growth is poised to reaccelerate as historic and unsustainable productivity gains give way to new hiring, and food and fuel inflation cool.
On the corporate side, ironclad balance sheets and a rebound in industrial production post-Japan disruptions are boosting CEO confidence. Investment spending is up. And spending plans are up.
Second, there are a number of technical reasons the market should rebound and push higher in the coming weeks. A surge of intense buying after the Greek parliament passed tough new austerity measures at the end of June was quickly eclipsed by a surge of selling pressure earlier this week. Is it a stalemate between the bulls and the bears? Not quite.
Technicals are positive
Chartists have flagged a troubling multimonth head-and-shoulders reversal pattern, outlined above, which traces a downside target of 1,160 on the Standard & Poor's 500 Index ($INX) -- which would take shares below last November's Irish bailout lows if the "neckline" is breached at 1,260.
I don't think it'll play out that way. Indicators suggest bulls still have the advantage. Measures of market breadth, or how many stocks are moving up or down, suggest buyers were more motivated in June than sellers have been in July.
This can be seen in the way the McClellan Oscillator, a measure of breadth momentum, recently spiked to its best reading in a year as investors bought everything that wasn't bolted down. High readings typically represent overbought conditions. But they can also represent uptrend initiations, according to Tom McClellan of the McClellan Market Report. (McClellan's parents created the McClellan Oscillator.)
There are other technical indicators worth mentioning here, such as the recent rotation back into cyclical stocks from defensives, which reversed a five-month move into staples, health care and utilities. Since the low late last month, the Morgan Stanley Cyclical Index ($CYC.X) has outperformed that staid Consumer Staples Select Sector SPDR (XLP) by around 6% as traders move into stocks like Deere (DE, news), Alcoa (AA, news), and Goodyear Tire and Rubber (GT, news), instead of things like Kraft Foods (KFT, news) and Coca-Cola (KO, news).
Other short-term measures point to a flameout by panic sellers, creating a vacuum that bargain hunters can move into.
This is represented by the very high reading earlier this week on the Arms Index, which is created when tons of volume move through declining issues as if investors can't focus on anything but stocks that are moving lower. It's fear at work. High readings are typically seen near market lows. And Monday's closing result was the most extreme Arms reading since last August -- just ahead of a powerful multimonth rally in the stock market -- and one of the highest in 60 years.
Third, market history is also positive. According to Jason Goepfert of Sundial Capital Research, stocks typically rebound in the wake of the kind of selling pressure we've seen over the past week. There have been 20 cases since 1950 in which the Arms Index has closed at or above current levels. One month later, stocks moved higher in 80% of the cases, for a median gain of 3.1%. Six months later, the win percentage climbed to 90% and the median gain to nearly 17%.
There's more. The selling seen on July 8 and July 11 was so intense that down volume trumped up volume by a margin of more than a 30-to-1. Given that stocks are above their 200-day moving average (making this a bull market by rule of thumb), this kind of downward pressure has been seen only seven times in the past 40 years. Of those, none marked the end of a bull market. Two months later, all sported positive gains, with an average return of 5.7%. And all went on to push to new highs, taking an average of 34 days to do it.
Fourth, the likelihood of a tail-risk scenario -- a disorderly default by a European country or the U.S. Treasury -- seems increasingly low. The European bailout fund, which was recently enlarged to more than $1 trillion, will likely be used to purchase deeply discounted Greek, Irish and Portuguese bonds in the open market. This will amount to a voluntary haircut by private investors, keeping the ratings agencies happy and reducing the debt burden of these troubled countries.
In Washington, a small debt extension appears to be in the cards -- enough to get us through the 2012 election at least.
And finally, corporate earnings growth and ultralow interest rates should continue to fuel the transfer of wealth from bondholders to shareholders via M&A activity, dividend hikes, and share buybacks -- a positive catalyst I first wrote about last September (see "Get ready for an epic bull market"). Indeed, according to Credit Suisse equity strategist Andrew Garthwaite, corporate buying of stocks has totaled 1.9% of total market capitalization -- nearly triple its three-year average.
It's set to continue: If corporate leverage -- now at 20-year lows -- returns to more normal levels, then earnings per share could jump nearly 20% as stocks are pulled out of the market and moved into business coffers.
VIDEO ON MSN MONEY
My friends, it time to BUY AMERICAN. Of course we would have to start MAKING AMERICAN
The problem is economic news that would have been considered terrible five years ago is now viewed as "not all that bad" or is spun as "signs of progress" by those with a hidden agenda. A reduction in new unemployment claims by 10,000 from 425,000 is now considered a reason to cheer, let alone do you even believe the government stats. This mentality will catch up with those who ignore the new reality. The stock market these days is for day traders only. Anyone, with retirement or college funds in the stock market better get their heads out of the sand before it is too late. How quickly they forget.
YUP.....But whether it's Warren mantra or the old saw of " buy low, sell high".; There are many opportunities and likewise many pitfalls.
Depends how you play the game and how much risk you are comfortable with.
Jumping in and out hardly, ever bodes well for the small investor.
And many small day traders have a tax bill they can't pay. Thus, they are out and have to go back to work at a real job, to pay the bill and build another gambling stash.
Now is not the time to bet the farm or house.......Unless maybe you are buying a house??
But do your research carefully and make your bets accordingly, for the times coming.
Maybe I should be a Financial Advisor ? I just gave you a $1000 fee, for free.
The truth of the matter is that the American consumer is now history and companies are going to find it hard pressed to squeeze money out of them and emerging consumers are even worse off than the Americans. Things are about ready to get horribly bad for businesses and I see stock prices just falling off the cliff here soon.
The time to buy was when the DOW hit 7,000. we have a much weaker economy then we did when the DOW hit 14,000 and the DOW is at 12,500 right now. Pretty much the stock market is over sold. And we are going to have huge selling pressures on the stock market from people trying to survive and cashing out their 401k pension plans and retired people cashing out to live on the money and states and local governments raiding their funds in order to survive.
This is not the time to buy folks.
Broke thru 50 day like butter again. We're headed back to 1280-1260 on the S&P. This will technically be the 4th test of this level. It's firm resistance, the market could be timing the announcement on the US debt limit.
I suspect the market will go bananna's if the congress passes an increase (though, that would be premature celebration considerin the host of issues facing "cheap money" today).
There is a scare tactics going on in Washington by both parties .
Even if we default, the government might only be deliquent in some of its bills but everyone will eventually get paid.
It might temperarily loose its credit rating. Big Deal. Institutions that borrow overnight including hedge funds will have to pay slightly higher interest. Rates are already too low little rise will not hurt them.
They must cut spending to the bone regardless of the so called deadline.
This is all due to unnecessary 2 wars started by Bush and carried on By Obama is what we are paying for.
B. Nancy, are you math impaired? "All caused by two wars"? hmm? the wars have cost less than 1 trillion over the course of ten years. Obama has borrowed four times that in his three years in office. All caused by the wars? You liberals want what you want because you want it and you want facts to be whatever you wish them to be to make you feel good about your irrational wants and desires.
The deficit this year alone will be 1.65 trillion, the Afgan / Iraq wars will cost 100 billion +/-. So where is the other 1.55 trillion. Realize that reality is not a strong suit for the fantasyland liberal, I can only say entitlements have been and are projected to grow three times faster than the economy. This is and has been the debt crisis driver. Facts are facts.
ANd if you are able to look at facts, you tell me the percentage growth in federal spending since 2008. Naturally, you will make up a number to fit your fantasyland liberal ranting. What can I say.
BE ADVISED: MSN Money suspended my posts for the last 2 weeks for makng "unwanted" posts.
These posts were neither vulgar nor abusive; just sarcastically critical of the "pie in the sky" rubbish foisted off as financial news. The point being, CENSORSHIP is now being implemented on the web. Plan accordingly.
As to this article "Time To Buy" I suggest you sell stocks and buy those items which will allow you to maintain your purchasing power in the difficult days ahead of us. There's a hard rain gonna' fall.
Comments a bit harsh. We should be thankful that so much negativity is being balanced out by a positive story for a change. I believe that huge cuts need to come to the civilian members of the government and the military to reduce the budget. Will this happen? Not likely in an election year. They will raise the debt ceiling and put the problems off until 2012 or later then watch out. Until then, I recommend leisure stocks like Disney to take your minds off something that none of us can change. But I bet if you removed everyone over 55 from the job market, unemployment would be zero. So much so that we would have to hire some of the elderly back and recruit from overseas. There are simply too many people over 55 who never prepared for retirement and they are holding this market back. And what happened to the drug war? If Nevada can impose 20 year sentences on drug traffickers why can't the federal government make drug and human trafficking a death sentence so we can spend that money on our elderly and poor? I'm sorry but the generation over 50 that is running this country into the ground are a bunch of pussies.
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