A pullback, but don't panic

We could see a 5% drop in U.S. stocks, but there's still a strong investing story in the U.S. this year.

By Jim J. Jubak Jan 20, 2011 5:47PM
Jim JubakI think we're looking at a pullback in U.S. stocks. A pullback in my book is about 5%. It's less than a correction, which is a drop of 10%. (Please note I'm talking about U.S. stocks only in this post.)

The reasons for this are numerous:
  • An overbought market ripe for profit-taking after a long rally.
  • Worries about a slowdown in China as it struggles to get inflation under control
  • More squabbles among Eurozone members over how to fix the continuing euro crisis
  • Good but not great earnings reports (and therefore disappointments) in the financial sector
  • A weak report on housing starts reminding investors the sector isn’t out of its slump yet.
I don’t see anything there that signals the end of the world, do you?

Post continues after video:
And I think that in the U.S. markets -- I stress, in the U.S. markets -- this is likely to be a relatively contained pullback. One of the strongest reasons to believe that, in my opinion, is the relative strength of the investing story for the United States over the next six months or so versus other global markets.

Think about it: Economic growth is picking up and interest rates are on hold in the United States for the next six months, anyway. In China, Brazil, India, etc. economic growth is likely to moderate (to a rate still way faster than in the United States, I grant you, but it’s the deceleration that counts) and interest rates to rise over the next six months. Is it a surprise that Wall Street strategists are telling their clients to put money into U.S. stocks and lighten up overseas?

How big is the U.S. pullback likely to be? I’m not a technical analyst and I don’t even play one on TV, but this is how a technician I respect sees the pullback right now.

Today on StockCharts.com, John Murphy bracketed the market like this: The Standard & Poor’s 500 looks like it’s headed below its 20-day moving average at 1270. (In fact, the index moved below that level briefly this morning.) If it closes below that level, we’re likely to see a correction that will take the index down to its 50-day moving average at 1237.

That’s about a 3.4% drop from the S&P’s level at 1280 as I post at 2:30 p.m. in New York.

All this is subject to change, of course, but this is what the U.S. market looks like to me right now.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.

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2Comments
Jan 21, 2011 7:53AM
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I also see a mild correction coming, although I am certainly not a prognosticator.  I have limit buy orders in for about ten stocks at 1% to 3% below their current market levels and expect at least some of them to be filled in the next couple of weeks.
Jan 21, 2011 12:08AM
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EDAP Continues Its Growth Strategy; Enters New Major Market for Lithotripsy

No pull back for this Bull.

 

 

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