You can tell a lot about the short-term direction of the market from how it responds to news.
A market that, in Wall Street parlance, wants to go up won’t pay any attention to bad news. It will rally anyway.
A market full of investors looking for an excuse to take profits won’t pay attention to good news. It will sell off anyway.
Today’s solid sell off—the Dow Jones Industrials finished down 203 or 2.1%–on what was a decidedly mixed bag of economic news is a sign that the market wants to correct at least a bit after its very solid September run and the longer rally that began in March. Volume was above average today so I think we should take this move seriously.
I can’t tell you how long any downturn will last. My belief is that there’s enough cash on the sidelines waiting to come in to make any correction short and shallow. But I don’t know how many money managers who loaded up on stocks to dress up their portfolio for the end of the quarter on September 30 did so with their fingers crossed and now want to unload equity-heavy positions that made them nervous even as they were buying them to avoid the potential wrath of clients.
Right now, this instant on October 1, the Dow Industrials are down a miniscule 3.3% from the close on September 22. That’s not enough of a dip to make me roll out the buy on the dip bandwagon.
But some stocks that I’ve been watching in these posts, looking for a decent entry price, have sold off more rapidly. And they’re now worth a look.
If you’ve been waitingto get into Potash of Saskatchewan (POT), for example, closed at $86.42 right now. That’s a very solid discount from the $95.78 I paid when I added it to Jubak’s Picks. Support is in the $85-$86 range so today’s price is a decent entry unless you think the market is headed to a deeper sell off than I do.
Similarly rare earth miner Lynas (LYSCY) closed down about 13.4% today. This could fall to $25 but $29 isn’t a bad price for starting to build a position.
All this selling—in the general market and for specific stocks—comes on a day with a decidedly good/bad mix of news. Which is why I think it’s significant.
This morning we had
The good: Pending home sales setting record gains. The index, which measures home many homes are in the process of being bought rose 6.4% in August. Economists had expected just a 1% increase. The index has climbed for a record seven straight months.
The good: Personal income and spending climbed more than expected in August. True the change wasn’t huge. Personal income inched up 0.2% and the consensus was looking for just a 0.1% move. And personal spending climbed by 1.3% in August, again slightly above the consensus expectation of a 1.2% gain.
The bad: The manufacturing index put together by the Institute of Supply Management stayed on the right side of 50. Anything above that number shows the economy is expanding. The index came in a 52.6 for September. That was a slight 0.3 percentage point drop from August. But the big problem is that economists had been expecting that the index would climb to 54.
And the ugly: Initial claims for unemployment rose for the week ended September 26 to 551,000. This was not only significantly above expectations of 535,000, but it also marked the first time in three weeks that the number of people filing new claims for unemployment rose. Based on the last few weeks, the stock market had managed to convince itself that a drop in unemployment was getting near. Today’s news was a disappointing reminder that we’re still a very long way from any decrease in unemployment. Economists say that unemployment doesn’t start to drop until new claims for unemployment fall below 400,000.
You’ll see that this hasn’t been a day of unrelieved bad news. When the rally was in full swing, I think the market would have managed to look past the bad numbers to the good and would have produced explanations for why the bad numbers weren’t as bad as they seemed.
Instead, today, we got explanations that emphasized why the good numbers weren’t as good as they seemed. Pending home sales were only up because of a rush by buyers to beat the November 30 deadline for the $8,000 tax credit for first time buyers. Personal income was only up because of higher Social Security, disability, and unemployment payments. Take out these transfer payments and real personal income fell by 0.3%.
See what I mean?
If you’ve been looking to buy at better prices, keep an eye on this market. I don’t think we’re going to see screaming bargains, but a chance to buy at a lower price is always worth considering.
But then again we get the unemployment number tomorrow and if it’s bad news…