Insights & Advice

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Expect a Bounce

All week long the markets played cat and mouse with support. Finally on Friday, it looked as though the bears had won as they drove the S&P 500, Dow and NASDAQ below their various support levels. It was not a pretty picture. And yet, the bulls rallied back.

Since everyone needs a fall guy, we can pin this week’s market action on the on-going problems with Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants. Both companies need to raise cash as the mortgages they hold continue to decline. Some even talk of nationalizing the two. And lest we forget, oil hit a new high after falling over $10/bbl. in two days. As the rockets red glare lit up the Iranian desert sky, the U.S., Israel and Iran continued posturing over who has the biggest missiles that can fly the farthest. This turmoil in the Middle East simply heightened the level of pessimism which could almost be seen dripping from the walls.

As I wrote last week, a market bottom usually coincides with extreme pessimism, panic and high volume. An unrelenting deluge of panic -inspired calls this week indicates we must be pretty close to that bottom. At the same time, the volume on the exchanges has increased as has the volatility index.

For the most part, the big players—hedge funds, brokers and some institutions—have had the market to themselves this week because even the day traders have retreated to the sidelines. Dese guys don’t mess around. They play with billions for fractions of a point that can earn them millions in minutes. They will run over anyone in their way. If ever there was a time for the little guy to find a money manager this would be it in my opinion.

Once upon a time (when I had hair), one of my clients, Sir John Templeton, advised me to buy securities when the blood was running in the streets. I’m sure he go that advice from some one else during his career (when he had hair). Sir John, to my sorrow, passed away just a few days ago but his words still echo in my ears. So this week I bought a little at what I believe to be a support level (between 1235-1245) on the S&P. If it goes lower, I will add a bit more because I will never catch the exact bottom.

But why buy now, you may ask, especially with all this talk about bear markets? Even in bear markets stocks do not go straight down and there are times when the markets can rally quite strongly despite the overall trend being down. Granted, it is not a game for amateurs. You need to live with your investments full time and very few can do that outside of the profession.

So what can we look forward to from here? I expect the markets will bounce but how high and how soon will depend upon the second quarter earnings season which has just started. If companies can produce upside surprises in earnings that will give the market some hope and possibly a boost. Those companies who export or who are in the commodities sectors have the best chance to do that. The financial and consumer sectors should, if anything, offer downside surprises. As for the trials and tribulations among our big mortgage companies, they are too big to fail. The government will step in as buyer of last resort and we the taxpayers will foot the bill.

A special note: I will be on vacation during the later part of next week so this column will not be available until the following week. I will miss all of you.

Posted in A Few Dollars More, At the Market