Insights & Advice

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Pullback in Progress

As I said last week, I was expecting a minor pullback in the averages and that’s exactly what the markets did this week. The damage was contained however and the 1,000 level of the S&P 500 Index appears to be the line in the sand for both bulls and bears. But as August wanes the number of market participants drops as well. That could mean additional volatility in the weeks ahead as volume drops below its already anemic levels.

Clearly market participants are a bit schizophrenic as conflicting economic data create confusion and uncertainty on almost a daily basis. Retail sales fell in July. That surprised a number of analysts who were expecting an increase. And Wall-Mart the king of discount stores disappointed by reporting only a flat profit instead of a gain.

On the plus side Germany and France are already returning to growth in their second quarters which no one expected. Those nations follow China and the rest of emerging Asia which have already reported rebounding economies.

Given our markets have already had a substantial rebound, many traders are using every negative news item as an excuse to take profits. While investors who have been sitting on the sidelines throughout the rally are using any sell-off as an opportunity to get in. That’s a recipe for the kind of markets we have been experiencing over the last few weeks.

“Profit-taking in the morning and then buyers rush in at the close but net, net, no change for the day,” is how one Wall Street trader described it to me on Friday.

Underneath all this trading and speculation I suspect that most American investors are still quite concerned about which way the markets are heading and are waiting for some clear signs that the economy has truly recovered. I can understand their point of view.
“We see families all the time who are nervous or even panicked,” says Tracy Munger, the executive director of Sugar Hill Assisted Living.

She manages the swank, senior living community which was formerly one of the many Crane mansions in Dalton, MA.

“Many had enough saved to take care of their mom or dad for eight years or more but now, thanks to the market, the money for that plan might only last for four more years. There is still a lot of anger and fear this year concerning the direction of the markets,” she explained over lunch in their sumptuous dining facility.

Several potential clients I talked to this week in both Columbia and Berkshire Counties expressed similar sentiments. They would rather be certain then sorry. Unfortunately, they had lost a great deal of their savings last year and cannot afford another bout with the March lows. If you too are in that situation, I suggest you start to inch into the markets by purchasing conservative bond funds (not Treasuries) and possibly dividend-paying stock funds but don’t bet the farm on them. Instead, invest a little cash when the markets pull back and then wait. There is nothing wrong with remaining a little cautious here.

Posted in A Few Dollars More, At the Market