“This is a nightmare,” said one trader this week as the stock market spiraled downward in what appeared to be free-fall panic. For those who kept their cool, it appears to me that once again the markets are providing us with another buying opportunity.
For the last month I have been warning readers that the markets were in for a 10-12% correction. Last week in “That sick feeling in your stomach” I put some numbers to what I saw as a potential bottom for this pullback. We hit those price levels, with the S&P 500 Index declining to 1055 on Friday morning. My target was 1065. I expect the index to bounce at least 100 points from here before pausing.
“But what if it’s a one day wonder and the markets tank again next week?” asked one worried retiree.
I suspect his question reflects the worry of many other investors out there. After all, the S&P 500 broke all sorts of levels on Thursday including its 200- day moving average, the ‘flash crash’ low of last week and the intraday low from the recent February decline. So here’s the deal: if this is really a head fake and the markets roll over again next week, I suggest we all switch gears immediately and raise cash. If the S&P 500 breaks 1050 on the downside (a real nightmare), I expect the index will fall rapidly to 973. Bottom line: it’s always smart to have a Plan B even if you don’t use it.
However, my confidence in calling a bottom is not simply technical. Two major events that have been pressuring the market for weeks appear to be coming to at least a short term resolution. The fear that the Euro might come undone and the European Union dissolved had always appeared to be a low probability to me, if not to others. The approval Friday of the Greek bailout by Germany’s Upper House of Parliament signaled once again that country’s willingness to back the union and its currency for the foreseeable future.
I believe there will be rule changes among members of the EU, such as stricter oversight of individual nation’s budgets and tougher penalties for non-compliance (including at some point expulsion from the union as a last resort). At the same time, I believe European, U.S. and Asian central banks are serious in their intention to support the Euro. That does not mean this currency can’t decline further because it can and will, but the rate and timing of that decline will be managed. Besides, a weaker euro will help Europe’s exports and that should help alleviate some of their economic problems.
The second unknown has been the passage of a financial reform bill. It has been the subject of internecine political battles for months on both sides of the aisle. Now that both the Senate and House versions have passed, a large part of the market’s uncertainity has been removed. I have often written that investors can manage both the good and bad of any event but they can’t stand uncertainty. A lot of the selling in recent weeks has been fueled by this debate. It will still take a month or two to reconcile the differences between the two versions of the bill, but at least Wall Street can now manage the risk.
I’m betting the nightmare is over and a week from now it will fade to bad dream status and a month from now it will have become simply another opportunity to buy on the dip.