Insights & Advice

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Is the Dip Done?

Is the 8% correction in the S&P 500 over? During the last five trading days the index has gone straight up. Since the intraday low of 1144, established on February 4, the S&P has gained back almost 6.5%. So far it has been a classic buy on the dip scenario. So why am I still cautious?

The short answer is because I can afford to be. Since advising a defensive posture prior to the drop from 1,150 to 1,044, I had the luxury of buying at lower prices as the markets declined. I still have some cash available in case the market suddenly decides it wants to go lower. In truth, I expected the S&P to bottom out somewhere between 1,015-1035. So maybe I was a bit too bearish but better safe then sorry. And I still have some lingering concerns. Hopefully, they will be put to rest once China opens for business after its week-long Lunar New Year.

Over the last few weeks, China has been implementing various actions to slow the growth of its over-heating economy. It has not played well on global markets since many countries are depending on Chinese demand to boast prices of various materials and other commodities. There is also talk that at some point this year, China may allow its currency to strengthen. So I’m going to wait just a bit longer and see what happens in China next week before I give the all clear. In the meantime, regardless of whether there is more or less short-term downside, the next upside target for the S&P 500 is around the 1,200 to 1,235 level. The growth in the economy appears to justify that move up.

“Í think 2010 will be better than many people expect,” said Ron Insana, the CNBC senior analyst and commentator, who spoke at the Berkshire Job Summit on Friday at the Crowne Plaza Hotel in Pittsfield.
Insana, who spent 22 years as a veteran anchor at CNBC, believes that all those who are waiting for the other shoe to drop in the stock market are going to be disappointed.

“We have had our correction,” he contends and also thinks that residential real estate, especially distressed property, such as condos in Florida, are at an once-in-a-lifetime buy right now.

The Federal Reserve’s decision to increase the discount rate by 25 basis points on Thursday evening surprised investors at first but Insana believes, as do many investors (including this writer), that it is a positive sign that the economy is healthy enough to begin taking the punch bowl away from the banks.

“It’s a move to discourage financial institutions from borrowing from the Fed, which is the lender of last resort, and instead borrow from the money markets.”

What investors should take away from this Fed action is that the money markets are back to normal. There is now no further need for a lender of last resort, which is the role that the Fed has provided for the last year.

Sure, the long-term implications are that interest rate will begin to rise but not immediately. At some point, probably at the end of this year, interest rates should rise anyway. It is a natural course of events when the economy begins to recover. Remember too that rates are at historical lows with no where to go but up. That means mortgage rates as well so if you have been toying with the idea of buying a piece of real estate now is the time.

Posted in A Few Dollars More, At the Market