A dip to buy?

Stocks bounced on Friday in response to a not-too-hot, not-too-cold jobs report. Is this a buying opportunity, or a pause ahead of further declines?

By Anthony Mirhaydari Jun 10, 2013 1:48PM

Stock investor copyright Tom Grill, CorbisJust when it all looked lost for the bulls, as the Dow Jones Industrial Average sliced below its 50-day moving average last Wednesday for the first time since December, the stocks bounced and bounced hard -- pushing the index up into a typical 62% retracement of its 4.5% peak-to-trough decline from the late-May highs.

 

The catalyst for the move was questionable: Payrolls increased 175k and there was a slight increase in the unemployment rate. There were market oddities: A surge of futures market activity started roughly half-a-second before the payroll report was released. And someone or something hammered the S&P 500 futures market with more than 1.1 billion quotes -- most of which were subsequently canceled -- in an avalanche of quote stuffing.

 

But nonetheless, here we are. With stocks in a no-man's land between short-term oversold indicators, ongoing central bank stimulus, medium-term signs of ongoing investor overconfidence, and long-term decay in economic and earnings fundamentals, here are a few things to consider:

 

Commodities/emerging markets

Volatility has returned to the global financial markets after months of liquidity induced calm.

The tremors first started in the commodities markets and emerging market stocks, which peaked back in January and have been sliding lower ever since -- warning that cheap money from central banks was, in fact, not the answer to everything.

 

 

Today, both are resuming their downward slide. Copper is dropping out of a two-month trading range while the iShares Emerging Markets (EEM) has fallen below its April lows. Not exactly a sign that all's well in the markets. This could have something to do with the disappointing Chinese retail sales and industrial production data reported over the weekend.

 

Bonds/dividend stocks

After commodities and EM stocks, the fixed income market started to tremble. Both high-yield junk and investment-grade corporate bonds peaked in the early part of May, along with dividend equity plays including mortgage REITs and utility stocks. The justification at the time was that the Federal Reserve was preparing to back off on its open-ended $85 billion a month bond purchase stimulus, allowing long-term interest rates to drift higher.

 

 

Many believed the shift would be uneventful as money would flow from bonds into stocks. The Dow would keep rising.

 

I'm not so sure. Interest rates have never been this low in recorded human history. We're in the midst of one of the weakest economic recoveries on record, with a full-times job deficit of 13 million and stagnant wages. And with bond yields so low, the bond market is extremely sensitive to any increase in interest rates, an underappreciated concept known as "duration."

 

Interest rates

And thus, as the yield on 10-year Treasury bonds went from 1.66% on early May to 2.18% on Friday -- an increase of 31.3% in one month -- the tremors have finally started to shake the precious U.S. equity market. This, of course, comes after the Japanese equity market collapsed and now flirted with outright bear market territory last week since Japan's deeply indebted government makes its economy much, much more sensitive to any increase in interest rates.

 

 

We've yet to see this story -- of a rapid increase in the price of money -- play out in the real economy. How will housing handle an increase in mortgage rates? Already, mortgage applications are falling.

 

The economy

And this increase in interest rates is coming at a time when the economy is already losing momentum.

 

 

The chart above shows that the Citigroup Economic Surprise Index breaking down through a pattern of higher lows going back to 2011 (shown above, yellow line). Recent economic data, including the U.S. ISM Manufacturing Activity Report, has disappointed to the downside. And history suggests that as this Citigroup measures weakens, stock prices tend to follow (blue line).

 

Corporate earnings

As for corporate profits, consider this peach from the folks at Reuters:

 

"In the S&P 500, there have been 91 negative EPS preannouncements issued by corporations for Q2 2013 compared to 13 positive EPS preannouncements. By dividing 91 by 13, one arrives at an N/P ratio of 7.0 for the S&P 500 Index. This 7.0 ratio is higher than the N/P ratio at the same point in time in Q2 12 (3.4), and is above the long-term aggregate (since 1995) N/P ratio for the S&P 500 (2.4)."

 

***

 

So, what to make of all this?

 

At this point, there just isn't enough evidence to justify new positions, long or short, just yet. The evidence is just too mixed. And the risks are too high.

 

I'm still maintaining shorts against emerging market stocks, looking for a bounce in gold and Treasury bonds, and believe market volatility is headed higher. But I've also raised some cash over the past week and am content to just sit on it until the signals strengthen one way or another.

 

I'm still keeping an eye on possible buy-the-dip picks Pengrowth Energy (PGH) and Logitech (LOGI) from my column last week. And on the short side, I'm watching stocks like RF Mico Devices (RFMD) and Caterpillar (CAT).

 

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​om​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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33Comments
Jun 10, 2013 2:17PM
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one day a crash or correction is coming and the next - Time to Buy? What a job you have - you can just throw out anything and you get paid - as an expert. Like throwing darts - one mine actually hit.
Jun 10, 2013 4:16PM
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Mirhaydari screams one day that all is about to burst, the Obama economy is a zero, we are about to crash, and now it's a buying opportunity.  This is an utterly unreliable person who is at best irrelevant.
Jun 10, 2013 2:58PM
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Anthony says hold back, the future is not clear. And if you follow Anthony, you know that's a buy signal!
Jun 10, 2013 2:59PM
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In short Anthony doesn't know what to do - sh*t or get off the pot. 

Believe me if you try to divine the direction of the market from charts or TA analysis, you'll lose money. You have to have a big picture view of what is happening.

I have done just that. Believe it or not. Here is a synopsis.

Globally Japan and America are leading the way in an economic recovery. This recovery is very weak, and even with the best efforts of the Fed, it will probably take years before we have anything resembling a normal economy.

The main driver of the recovery is housing with autos following behind. Of course, this influences positively many other goods and services. Bonds have been in a bull market for 30 years and have reached their ultimate peak on behalf of the Fed. Bonds have no where to go but prices down and yields up. The bond market has become rattled lately as it sees the economy recovering which is signaling inevitably higher interest rates. Dr Bernanke also helped probably unwittingly by simply pointing out that the Fed would either have to sterilize its bond and MBS purchases and in some case perhaps monetize the treasury debt!

Where can the money from bonds go as the bond market sells off? It is either cash or stocks. My bet is stocks. The CAPE P/E ratio (developed by Robert Schiller) is a moderately high 23, but this number is only half of what previous bull market peaks have been. Also according to Jeremy Siegel (Stocks for the Long Run) there is enough earnings growth and multiples expansion to get at least  17K on the DOW. 

I actually believe that this bull run will last a lot longer and go a lot higher. I'm at around 20% cash and trying to put the rest to work. So in short, perhaps we are in the middle of the economic recovery which will last a few years. Stocks will do whatever, but I believe they will go much higher as the economy struggles forward. 

Har har har me mateys!
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"And someone or something hammered the S&P 500 futures market with more than 1.1 billion quotes -- most of which were subsequently canceled -- in an avalanche of quote stuffing."

 

Time to get rid of computer trading and put the person on the floor again.  Slow it down to prevent mistakes.

Jun 10, 2013 3:25PM
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Oh please, please stay bearish.  I am thinking of getting into cash based on this article.

 

Like the saying goes, even a blind squirrel finds a nut once in a while but I still need to see Mrihaydari prove he's even a squirrel/qualified analyst before I follow anything he says.

 

This cat makes the weather people who try to predict what's going to happen in a week look like Nostradamus!

Jun 10, 2013 4:19PM
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It seems that Anthony has forgotten the basics, the fundamentals. He vacillates back and forth, shows charts out the wazoo, and states the opposite of what he stated the previous day. Anthony, perhaps your talents would be better suited in the commercial cleaning or food service industries....
Jun 10, 2013 3:38PM
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Congratulations, Anthony.  No matter what happens in the market tomorrow, you have set yourself up to say, "See, I predicted that!"  You, sir, are a genius.
Jun 10, 2013 3:43PM
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Anthony needs to consider that there are still millions of small / medium investors still on the sidelines. They are still there because they were burnt by the dot.com bubble and the Dodd-Frank housing bomb / fiasco that blew up in the fall of 2008.

 

I would have thought that by the summer of 2009 investors would have smelled the coffee, but investors have often been a mystery to me.

 

After selling most of my stocks in July 2008, I got back in between May and July of 2009 and haven't looked back. Luck you say? Not at all........after 40 years of investing, I look not only at fundamentals but also the actions of the "current" breed of Americans and their thinking / emotions.

Jun 10, 2013 3:01PM
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Nice observation Nikongreg ! Am suggesting that MSN give Mr. Mirhaydari his former job back as
inter-office mail clerk. You are indeed the king of Dart-Throwers and you haven't as much as smelled
a bullseye let alone come close to hitting one in a long long long time !!!
Jun 10, 2013 6:07PM
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I literally LOL-ed when I saw the link to the article: "Mirhaydiri: Time to Buy?". 
Jun 10, 2013 3:29PM
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Hey Mirhaydari'do a favor for me Screw you with your chart.
Jun 11, 2013 6:24AM
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The most bizarre thing going on right now is-- the artificial simulation of improvement. Where is it? The whole world has the exact same view and vantage points as all these Kool Aid believers and yet, there isn't any PROOF of improvement anywhere. It's almost as if a totally detached people took the trillions Bernanke has printed and are attempting to create their own economy, minus the other 7 billion of us. Nice in theory but ultimately you end up hamburger once the world gets tired of the constant annoying fake euphoria that can't be found by normal people.
Jun 10, 2013 7:51PM
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If any of you sat in cash the last 8000 DOW points by listening to people like this, then you are utter and complete fools.
Jun 11, 2013 6:29AM
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"If any of you sat in cash the last 8000 DOW points by listening to people like this, then you are utter and complete fools."

 

If any of you ignored all the obvious signs of manipulation and put all you had into a fake stock market instead of a future with a livelihood you control and a destiny you create, then you have taken the low road and won't finish how you think you will. Fake financial wealth isn't success, it's toxic.

Jun 10, 2013 2:21PM
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solid article anthony and very helpful/unbiased.  at some point these bulls will learn to spell the word "fundamentals" once again.  thanks.

Jun 10, 2013 6:48PM
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You guys have put Antman into a conundrum finally...

And have him caught at the end of the maze, with no other way out...

So he is looking at and plying other options...

Smart analysts and investors use those principles to their Avantage..Occassionally.

Jun 10, 2013 2:39PM
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PLEASE BUY... PLEASE... put everything you've got into the markets as soon as possible. Any IDIOT can see we are steps away from catastrophic failure. When you go, go big... you psychopaths deserve it. There's a Kumbaya Club in Hell. Hand baskets required.
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