With the S&P 500 at its highest level since the summer of 2008, investors previously sidelined by reoccurring fears of a double dip recession and nagging worries about a disorderly Greek default may now be tempted to hold their noses and dive into the market where, presumably, they will be swept along to the land of outsized profits by the Dow 13,000 wave. Having said this, it is worth noting that often the best time to sell is when everyone else is buying. Now may be that time. [Let me explain.] Words: 885
So says Colin Lokey (http://blog.lokeyisstreetsmart.com/) in edited excerpts from an article* posted on SeekingAlpha.com which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
Lokey goes on to say, in part:
The bull case. To the casual observer, it is easy to think that the economic recovery is back on track and Europe has finally put its problems behind it. There is some merit to this point of view:
- The unemployment rate has dropped to 8.3%. Last month’s non-farm payroll report showed the economy added 243,000 jobs in January, 93,000 more than economists’ were expecting. The gain was largely the result of a substantial uptick in service sector jobs which is key, as many analysts believe that manufacturing alone cannot fuel the economic recovery. The brighter employment picture seems to be making Americans feel better about the economy as consumer sentiment surged to its highest level in a year in February. Additionally, manufacturing activity as measured by the ISM, hit its highest level in half a year last month.
- A disorderly Greek default has been averted, at least for the time being, and the ECB’s Long Term Refinancing Operations seem to have succeeded in stabilizing the market for Italian and Spanish sovereign debt…
…The bear case, however, has several components:
1. The geopolitical component. Currently, there are two significant political problems that, when taken together, have introduced a considerable amount of uncertainty into the market:
- Iran has effectively created a floor under crude prices by cutting off oil exports to Britain and France and by continually ratcheting-up its rhetoric regarding the closure of the Strait of Hormuz through which around 30% of the world’s seaborne oil travels. The decision to cut exports is a preemptive move designed to punish France and Britain for their participation in an embargo of Iranian oil set to begin on July 1st–the embargo is an attempt by European nations to punish Iran for its rogue nuclear program. While the disruptions to the oil market are themselves disconcerting, the real concern is that Iran will conduct a preemptive strike on Israel to prevent Tel Aviv from bombing its nuclear sites.
- The civil war currently raging in Syria. While its direct implications for stocks are few, it could certainly introduce more uncertainty into markets if the situation worsens, necessitating intervention by NATO or U.S. forces to put an end to the violence.
Who in the world is currently reading this article along with you? Click here
2. The economic component:
- Consumer spending accounts for around 70% of U.S. economic activity and, after gaining some momentum midway through 2011, spending ground to a standstill during the last three months of the year even as consumer credit expanded. Accounting for inflation, spending actually fell .1% in December.
- Rising oil prices pose a real threat to spending going forward as consumers are less likely to spend when they perceive that gas prices will continue to rise for the foreseeable future.
3. The European debt crisis:
- Nothing is fixed. The second bailout awarded to Greece is little more than a quick fix to avoid a catastrophic March 20 default.
- Greece will default sooner or later and delaying the inevitable is likely to make the event that much more painful when it actually occurs.
- The ECB has no current plans to implement a third round of LTROs after next week’s second offering. Although difficult to prove conclusively, it is widely believed that the ECB’s three year, low interest loans to eurozone banks are largely responsible for preventing a disastrous spike in Italy and Spain’s borrowing costs which, had it occurred, could have caused the two countries to go the way of Greece.
- Borrowing costs could start to rise once again in the absence of further stimulus, an event which could plunge the eurozone right back into crisis mode.
4. The technical component: On a technical basis, the market looks oversold.
- The Williams R% indicator reads -11.42 for the Dow, -9.64 for the S&P 500, and -8.32 for the Nasdaq. Readings from -20 to 0 signal overbought conditions.
- The slow stochastic oscillator registers 87.21 for the Dow, 86.05 for the S&P, and 84.67 for the Nasdaq–readings above 80 generally mean the market is overbought…
- Five of ten S&P sectors are up by 10% or more already this year. Specifically, materials, industrials, consumer discretionary, financials, and information technology are up 12%, 10%, 10%, 13%, and 15% respectively. Only two of ten sectors are down this year and one of those is off by only .66% (telecom).
Considering the economy is just now limping out of a fairly deep recession and taking into account the extremely volatile nature of the debt situation in Europe and the political situation in the Middle East, it seems this market has come a bit too far too fast in 2012. Now is the time to buy puts on the SPY.
Editor’s Note: The above article has been has edited ([ ]), abridged, and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Why spend time surfing the internet looking for informative and well-written articles when we do it for you. We assess hundreds of articles every day, identify the best and then post edited excerpts of them to provide you with a fast and easy read. Sign-up for Automatic Receipt of Articles in your Inbox and follow us on FACEBOOK | and/or TWITTER .
The U.S. Dollar Index is signaling that this rally might have a bit more room to run. [Let me explain.] Words: 400
At the end of November 2011 the U.S. behavioral indicator for the U.S. stock market, based on insights on investor psychology, touched the crisis threshold for the fifth time (1971,1979, 1986, 2006) since 1970. If the current case follows the four prior cases, we expect a similar positive return from November 2011 to the end of October 2012 as in the four prior periods followed by a decline somewhere between 15% and 30%. [Let me explain.] Words: 317
Initial unemployment claims may be the most important economic indicator for the stock market in 2012. It is one of the three components of our Fundamental Stock Market Indicator (FSMI), which is highly correlated with the S&P 500, [see graph below] so if initial unemployment claims remain under 400,000 and possibly continue to head lower during January, that would support the strong stock market rally that has kicked off the New Year so far. Words: 395
Next year is a Presidential election year, and the stock market is almost always positive in election years. Right? At least that assurance has been a supposed truism for many decades, and repeated as fact each year in numerous interviews and financial columns. [Let’s explore just how correct those assumptions really are.] Words: 367
Should we jump into the market now? [Let’s take a look at the 178 year history of the 4-year Presidential Cycles and the Decennial (10-year) Cycles and see what they suggest might well unfold in 2012.] Words: 1174
The stock market and inflation expectations remain joined at the hip. As the crowd anticipates higher inflation, the stock market rallies, and vice versa. This positive correlation between inflation and stock prices (a proxy for the economic outlook) won’t last forever and it’s anyone’s guess when [that will be but I have my views on it if you are so interested]. Words: 557