Regular Switzer readers and my clients who read my Inside Markets knew I warned a pullback of the stock market was inevitable. The best gauge of the US market — the S&P 500 — rose around 40 per cent from the March lows and has come back seven per cent from the high on 12 June.
That was a big rally in a short time and players got ahead of themselves. At the same time, other markets such as the oil market have fallen on rough times with the price of black gold or ‘Texas tea’ slipping under US$60 a barrel. It has lost around 10 per cent in value in one week!
And as stocks and oil were given the snub, Treasury Bonds did well as some investors sought safety and this brought yields and therefore interest rates down.
Ironically, this rejection of stocks and oil is a good ‘bad’ thing as the hopeful, emerging recovery does not need expensive energy prices and higher interest rates.
The loss of market enthusiasm could actually be a good thing to make the broadly tipped second-half recovery happen.
By the way, we are now in the second-half and it wasn’t a great start with the latest unemployment numbers and consumer sentiment reading going in the wrong directions.
Consumer sentiment from the University of Michigan and Reuters went from 70.8 to 64.6 but economists expected a drop to 70. That’s not good.
Still in the US, unemployment jumped up to 9.5 per cent in June. This is the worst result since 1983 and is a lot higher than the eight per cent predicted by the US administration.
One big reason is, believe it or not, that the Yanks have only received about 10 per cent of the $US787 billion earmarked in the country’s stimulus package. Unlike Australia, Obama’s team went mainly for infrastructure spending and this always comes with a delay — we’re seeing that delay in recent economic reports.
President Obama has been quoted as saying his stimulus package: "was not designed to work in four months — it was designed to work over two years."
This is good news for patient long-term investors but not for short-termers!
Economic data will be important to determine how far the US market and therefore our market pulls back in upcoming weeks, but I reckon company earnings will also be a big market maker or breaker.
This week, we get the show and tell from some really big names such as Intel, JPMorgan, Bank of America and Citigroup.
The one I’m keen to see is General Electric, which has lost 34 per cent in a year, making it the dog of the Dow Jones 30. This is a company in so many industries, so its story on 17 July, Saturday morning our time, should be insightful.
Goldman Sachs and Deutsche Bank commentators all see the company reporting season and the outlook comments as being critical to the market’s direction.
Lately, the smarties have been leaving the market as the mums and dads have been returning with their confidence helped by the big rallies for shares.
A guy called Charles Biderman from TrimTabs looks at the flow of money into or out of mutual funds and exchange-traded funds, and as inflows were rising, his research told him that corporate investors were selling at heavy rates.
This comes as volumes have been rising, especially on down days, and the VIX or fear index has been rising from 25 to 29 in recent weeks.
Also, chartists have noted that we have gone below and stayed below the 200-moving day average, which is a negative sign. And the stock market has created a head and shoulders pattern, which also is not a good sign for bulls.
Recent buyers could have been set up for a sucker punch in a classic sucker’s rally! This could easily be decided either way by the company results over the next few weeks.
Dow stock Alcoa was the first to report and came in with a lower than expected loss and a more positive outlook. If we get lots of these kinds of results, then the pullback will be arrested and the market could start heading up.
What to do?
If US companies do better than expected, the market will take off again. However, if the results are worse than expected, short-sellers will take the market down again. You can see why the next few weeks are vital.
For the long-term investor, getting in now could see you wear a short-term loss, but I say by Christmas you will be on good terms with yourself. If you were a long-term investor, you could split your lump sum in half and buy now, and then again after the results. If they’re bad, you can buy again after the sell-off, and if they are good you can rush in with everybody else.
Doing nothing now could mean you get to buy after a possible sell-off and that could be great, or you miss the boat if the market takes off. The sucker punch could be a self-imposed uppercut from doing nothing.
What do I think will happen? I don’t know, but the economic readings over the June quarter were better than expected and the stock market rode up with the S&P 500 going from 811 on 1 April to 946 on 12 June — that’s 16.6 per cent – although it had gone down a little by the end of the month. The only thing that works against this more positive view was the rotten jobs reports. By the way, when we get the first good one where the jobless rates fall, that’s when the stock market will go BOOM!
Good luck with your decision, but if you are a long-term investor, remember time is on your side.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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