It is no surprise that the markets were having a hard time moving higher this week. Investors went into this fourth quarter earnings season primed for another big leg up. The problem is that so much of their expectations are already discounted by the market.
Normally the market’s “off-season”, which is what I call the period between earnings announcements, is a time where stocks either correct or consolidate. But during this last off season (beginning at the end of third quarter earnings), stocks actually moved higher by about 5%. Investors bid the markets up, expecting good earnings to be announced for the fourth quarter. But the last two times this happened, the market fell as earnings were announced and it appears that is happening once again.
Remember that the market is a forward looking mechanism that discounts the future whenever possible. Now that earnings are coming through, investors are selling. Take Intel and JP Morgan, for example, both companies beat estimates (unlike Alcoa, which missed) and both stocks sold off almost immediately after the announcement.
Coincidentally, the S&P 500 hit my medium-term target of 1,150 on Thursday most likely propelled to that level by the same discounting mechanism. Over the last few months, I’ve been preparing readers that once we hit that level some selling would be a real possibility. That’s not to say the stock market is in for a big correction. I don’t see that. Given my contrarian nature, I believe it’s an ideal time to put more money to work, if you can.
This week I interviewed my friend, John Roque, technical strategist and managing director at WJB Capital Group, for our radio show “Investing with Bill Schmick” on Vox channels throughout the Berkshires. You remember him. He was one of the few players on Wall Street who called the 2008 decline in the markets and I passed his comments on to my readers as early as December, 2007. More recently, he also advised readers to buy gold under $1,000/ounce.
“I think the S&P 500 can reach 1,200 this year,” John says.
Some of the sectors he likes are healthcare, industrials, technology, basic materials, energy and consumer discretionary. He also likes commodities in general, although he thinks that gold is due for a period of consolidation. Silver, on the other hand, looks even more promising.
“I’m not saying that you should sell gold, just practice a little patience. Silver has industrial uses as well as jewelry so demand should improve. My price target on silver is $30 an ounce.”
As for the markets, this coming week will be another “buy on the dip” opportunity for readers. If you have been following my columns, you should have cash on hand to take advantage of this drop. As a guesstimate, the S&P could fall back to the 1090-1100 range but don’t hold me to that. Short term calls are always the most difficult to make. It may turn out that next week’s earnings announcements will be so far ahead of investor’s expectations that the decline will be nipped in the bud. Let’s hope so.