Do you feel the psychology of this market changing?
A few weeks ago I think you could have accurately said that investors on the sidelines were waiting to get into what they saw as a continuing stock market rally. I think that was true as late as April 15 (when the Standard & Poor’s 500 Stock Index was at 1212) or even April 23 (when the S&P 500 was at 1217.)
But now, on May 4 I think it’s fair to say that many investors in the market are looking for a day to get out.
And I don’t think it’s just because the S&P 500 is down a piddling 3.5% from April 22 to May 4.
Some of these folks were planning on getting out later in May or June when earnings season was over and the stock market was ready to slide into its summer doldrums. Now it looks like moving sooner rather than later was the better strategy and they’re worried that they missed their chance to get out. (I don’t know why I’m writing “they” here. I belong in this group. I was waiting for the end of May to trim some positions. Since my March 24 sell of PepsiCo (PEP) out of Jubak’s Picks I’ve sold five stocks and added three. But frankly I was planning to move that ratio further toward selling later in May.)
Some have been freaked by the crisis in Greece, the fraud charges against Goldman Sachs (GS), the impending crisis in Spain, the shellacking that the huge oil release in the Gulf of Mexico has delivered to many energy stocks or whatever. They’ve just decided, again, that the stock market is too risky. (I’m not saying these investors are wrong, by the way.)
And some, while not freaked, have decided all the trends they see over the next six months (or longer if you’re a pessimist or realist. You know the difference? You’re a pessimist if your fears turn out to be overblown. A realist if they turn out to be correct.)
The European Union is moving from a small Greek debt crisis to a much larger Spanish debt crisis. (See my post https://jubakpicks.com/2010/05/03/greek-crisis-postponed-its-time-for-the-spanish-crisis-to-move-front-and-center/ ) China is determined to slow its economy. (See my post https://jubakpicks.com/2010/05/03/china-tightens-again-speculation-on-when-the-big-moves-will-come-rises/ ) Brazil and India (and much of the rest of the developing world) have decided to raise interest rates to fight inflation. (See my post https://jubakpicks.com/2010/04/29/brazil-raises-interest-rates-as-emerging-economies-step-up-their-fight-against-inflation/ )The U.S. economy is growing but 3.2% GDP growth, the figure for the first quarter, isn’t exactly going to set the world on fire.
Those trends—European crisis, stepping on the brakes in China, higher interest rates in emerging economies, decent but not stellar growth in the United States—really aren’t any different than what I’ve been telling you to expect for 2010. What is different is the market reaction: instead of buying on the hope that somehow a stock or sector will thread the needle and find the narrow opportunity among all those worries investors are now looking on good news as a chance to exit from a market beset with woes.
What does that mean for you?
If you’ve been waiting to sell until later in May or June—after an earnings announcement or some news event—rethink your timing. I don’t think this market will deliver much of a bounce on good news so instead of waiting on the event, wait for one of those reaction rally days to do any of the selling that you had planned.
Look around for bargains among growth stocks. Stocks really aren’t responding to good news with higher prices right now. And many that have jumped on good earnings news in April have just about given back all of the bump. Cummins (CMI), for example, has lost pretty much all of its post-earnings. Teva Pharmaceutical Industries (TEVA) has sold off on relatively minor bad news and got no bounce today when it announced earnings per share 2 cents above the Wall Street consensus. I don’t see any need to load up here but some selective buying of stocks that you passed up just because they were too expensive using some of the cash that you realize from selling would be reasonable.
But keep some powder dry. I don’t think we’ve seen the end of the crisis in Europe, or worries about growth in China, or interest rate increases in emerging markets. I think there’s a good chance that you’ll see better bargains in emerging markets especially later in 2010.
Just remember that in bargain hunting as in any other part of investing, it doesn’t pay to be too greedy. The U.S. market hasn’t yet broken major support—it’s merely testing. That can be scary enough but so far, to me at least, the U.S. economy looks strong enough to keep this from turning into a stock market rout.
Full disclosure: I own shares of Teva Pharmaceutical Industries in my personal portfolio.
STL,
I think Item 4 kind of answers your question:
> 4) Ideally, if we get lucky, we will see a rally over the next week, with deteriorating characteristics — that sets up a better entry for shorting new positions.
The primary tren in the context of BR’s post is the up-trend we are seeing since March 09 lows. Now we are in the process some heavy-duty correction (~25%). At some point, there will be a secondary, that is weak, trend up, at which point it will be better to short the market (or individual stocks).
By the way, I am not sure how he comes up with all this clairvoyance.
bsdgv…
Could you please explain what Ritholtz meant by this statement…
3) This is not an end of primary trend expectation — rather, it is looking at the potential of a secondary trend.
Thanks!
Barry Ritholtz went from 69% cash to 100% cash over yesterday. Things are getting serious…
http://www.ritholtz.com/blog/2010/05/cash-100/
Jim: Would love to have you expound on Macro (World economy) vs. Micro (US economy) more. Enjoy the thoughts and posting banter on individual stocks but really, US stocks (the only ones I invest in) and stock market is today more macro than micro – in my opinion.
My read – macro – the World is in financial trouble. The European Countries have been socialized for so long, people there won’t give up anything despite their countries being bankrupt or near bankrupt. If Greece bailout fails, which I predict, Spain and Portugal and who knows who else will follow. I think Europe, including the UK, are destined for a deep and prolonged depression. That will hurt US Companies trying to do business there. Micro – US – stock market rise since March of ’09 aside, our economy is in trouble as President works hard to socialize us. Unemployment is deep and pervasive; deficits cannot be solved by more spending and borrowing. Finally, we’ve become an entitlement society; the private sector, the banks and Fed are under attack. See a shift from private to government which I predict will send the market into a tizzy until it finds a floor. In any event, I’m 100% out except for some perferreds and munis for income.
Keep up the good work.
EdMcGon:
I didn’t mean ‘Jim was a recent bull until today’. BR and JJ are similar their long and short term views: a cyclical bull market inside of a long term bear market. They both turned tactically optimistic recently and quickly reversed yesterday(JJ) and today (BR). Maybe they inspire each other. Who knows?…
bsdgv,
I wouldn’t have called Jim a recent bull until today. He accurately called this recent runup: a cyclical bull market inside of a long term bear market.
Barry Ritholtz who was kind of bullish like Him (I mean Jim 🙂 until recently turned bearish today:
…we may be looking at more than the run of the mill 5-9% correction that has been the downside limit of the rally dating back to March 2009.
… As of this morning (with the futures looking up) we are at ~69% cash.
…We could see a deeper than 10% pullback. Depending upon conditions and internals, our expectations are that we will be buyers into a 10-20% correction.
…I still expect a 25% correction at the end of this rally.
http://www.ritholtz.com/blog/2010/05/market-changes-tone-during-correction/
hoc1881,
That link may be the best argument for the coming collapse of the euro I’ve seen yet.
To those of you who think the good economic times will continue in the U.S.: I wish I had your optimism. I would be delighted to be wrong while you are right.
To those of you who see the coming collapse as an opportunity: God bless you! That is the right kind of optimism! USDAportfolio has the right idea. Watch the valuations folks, then vulture them when the good stocks get cheap.
how much the PIIGS owing ??
check this out >>> US$3.9 trillion far greater than post Lehman CP crisis of US$2.2 trillion
http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global
If you are investing in individual companies, as it seems that most readers of this blog do, then the questions you have to ask yourself are: 1) “How confident are you in your fair value calculation of the companies you’re investing in / studying?” and 2) “How greedy are you?”
If “the market” moves down, what that means is that the market is pricing in risk and calculating new fair values for companies. In the process, overvalued stocks will become more fairly valued. At the same time, fairly valued stocks may become “fat pitches”, and certain “fat pitches” will get fatter as they are sold in the chaos.
A rational investor will only invest in “fat pitches” — those stocks significantly under fair value. If you are confident with your fair value estimate, then it’s a matter of how greedy you are. You can sit on the sidelines waiting for a fat pitch to get fatter, but then you risk several big up-days, or maybe a couple days when you’re occupied with family obligations and not monitoring your “watch list”, and you miss the fat pitch altogether.
By my calculations and my accepted level of risk tolerance, most stocks that I monitor are now fairly priced (or near enough fair market value to not be considered “fat pitches”), many are overpriced, and yet a great number of good stocks are still under-priced even after this recent rally. Continued good news will increase many of my fair value estimates, but good news is also very quickly priced into the current market price of the stock. (An example of a stock I recently bought is First Solar. My calculations show it’s a good buy at or below $115, which is when I bought. When the earnings news came out, it jumped 17% in one day. If I had waited, like I did with Dendreon, Las Vegas Sands, and many others, I would not own the stock today. We all have numerous other examples of a stock quickly “getting away” from us.)
My point is, you have to ask both questions. If you adjust your “buy” price downwards because you are pricing in new information that will affect the company, or if you were never confident in your fair market value calculation to begin with (or if you never had such a calculation), then waiting for a lower price is probably a good idea. But if you’re adjusting your “buy” price downwards because you just want more upside potential, then you have to ask that second question: “How greedy are you?” If you’re confident that a stock is already a fat pitch, waiting for it to get fatter can backfire and you can lose your opportunity. If you’re also confident in your estimate, but have to admit to being a bit greedy, then you probably should dollar-cost-average your way into your picks until they’re above your “buy” price.
Good advice Jim, yet i don’t think anyone should be in this market. The risk is all to the downside with little to be gained to the upside as its so overvalued.
Jim and you savvy and experienced investors out there:
In relation to half-full/half empty thinking on a specific stock — I would love to hear your thoughts on TC. NOW I can say I wish I had sold off more to lock in the gains. But since that did not happen and it has gone down quite a bit now, would it be a wise move to use part of my cash “on the sidelines” to buy more TC at this low? It has been so strong until recently …
Jim
I have been feeling this shift that you are talking about. The down days have been on higher volume. Up days on light volume. I have been slowly selling some stocks locking in gains. I bought a little GG yesterday. I am holding positions I am long on like CSCO and IMAX.
Glad to hear others are feeling the the up trend is still in tact. We will see.
I have a 55 stop on teva but have been looking at rig at 72 could that be a mistake?
There is no real way to yet put a number on what they could lose and Jim Jubak still like them at 105.
I’m one that looks at the glass half empty and will not become a better investor until I understand risk and reward a little more.
XY…
Thank you for the cat and mouse puzzle!! 🙂
I keep reading about cashing out now or making sure you have a large cash position and then jump back in later. For someone like me who isn’t savvy enough to beat the market short-term, is it fairly safe just to leave what I have alone such as INTC or GLW until 2011??
bobisgreen, sigli, others,
The interesting thing to look here is just what kind of trader/investor you are. One says everyone starting to panic, time to get out with my profits. The other says “they” are overreaching, time to invest for the future, when “they” figure out that “their” wrong. And certainly going into a time of year where people normally sell off it exactly the time of year you would expect this split in opinion, because both are looking at the world from two completely different points of view.
Interest to see. What kind of trader/investor are you?
BTW In California we have been getting above normal snow/rainfall this year (might be stealing it from the Midwest though)
Their half empty is my full! Cheaper equity prices! Problems in Europe, and Brazillian, Australian, and Chinese tightening, declining developed nation fuel consumption, low housing prices and extremely low rates, all point to extremely moderate inflation, making middle class incomes stretch further. Combine that with corporate profits soaring plus low borrowing costs, higher productivity lowering the price of US made goods, a rebounding manufacturing sector, and the possibility of a great farming boom to bring back the mid-west to the south to California (if they can get a few drops of water).
What’s that old saying about never discounting the American consumer? Maybe it’ll be the right advice again.
Jim, good call on Potash!! I’m so happy to say I took your advice — kicking myself when I stopped out 111 and then saw it go to 112, but funny how a few days gives you better perspective! I’m only sorry I bought back Teva yesterday, but OTOH, it’s sure a good long term holding so no real problem there. Yep, this is what we pay this guy for, seeing that downside risk.
At least I’m not the only one . . .!!
Glass half full to half empty? Justified? Bull!!! Remember when earnings reports were, as you classified them, “not as bad” as they were? When the other numbers weren’t as bad as they were a couple quarters ago? Now, it looks like housing starts are up, consumer confidence is up, and almost, (almost mind you) every bloody number reflects a positive change in the economy. Well, give me a break! There are bright spots in the market, spots where I’m making a decent buck. One thing is certain, though, they’ve (who ever “they’ve” is) sold the crap out of the news. I’m not part of the “they” referred to in this article. I will use this time to squeeze a lemon and make lemonade.
Jim,
I agree wholeheartedly! As I said in an email earlier today, even a 100% cash position wouldn’t be a bad idea right now.
Good advice, Jim. I’ve still got some cash sitting on the sidelines but I’m invested long for a while longer. As long as the Fed keeps the Punchbowl filled there is no reason to think that the Big Financials aren’t going to play with all that free cash and keep their earnings up and keep the market moving a little higher. I have bought some protective puts and calls and I’m still bullish on Gold (with all the currency problems out there now and in the foreseeable future) but I think the rout of the market is still a ways off. Keep posting your thoughtful comments to us.