The economic numbers have been positive. The same could be said for overseas market data as well. Third quarter earnings, for the most part, have also been robust. So why isn’t the stock market resuming its winning ways? I believe it is a classic case of selling the good news.
Readers may recall that I have often said that stock markets tend to discount the future. It is why the stock market rebounded since the lows of March by over 50% without any real evidence that the economy was in recovery.
Now, seven months later, the data is beginning to support this massive run-up. Four out of five companies are reporting “better than expected earnings” in this third quarter, but their stock prices have already sported solid gains reflecting those expectations. Since it’s going to be several months before another quarterly result is announced, investors are using this positive event to take profits.
There are always exceptions to this rule however. But, unless a company comes in way above anyone’s earnings expectations and provides even better earnings guidance in the future, chances are traders will sell in the short term.
Lately, I perceive that investors are getting a bit more finicky about what they are buying (and selling). As the markets move higher, fewer stocks are participating and that’s usually a short term warning sign that the market’s strength is waning.
I say short-term because at some point, if the recovery continues and the economy continues to grow (which I think it will), investors will move back into those stocks and take advantage of lower prices. It is simply another way of buying the dips, which is what has been going on in the stock market since March.
The same can be said for commodities. Gold, silver, oil, basic materials even agricultural commodities, have had good runs lately on the back of a declining dollar. Every time the dollar undergoes what is called a “relief rally’ meaning a spurt of strength in an overall declining market, commodities sell off. That does not mean commodity prices will not go higher, it just means there is a natural two-steps-forward, one-step-back process that you, the investor, can take advantage of– if you have the courage. The same can be said for the stock market.
Now no one likes to buy securities of any type when they are going down, but that, my friend, is how you make money in the markets.
“But what if the stock goes down even further?” argued a prospective client in Texas this week.
That’s the rub and the risk in investing. There is no guarantee that won’t happen, so don’t buy your entire position in one shot. Buy a little here, a little there and when the markets do turn and move higher your average cost will be far lower than if you simply chase stocks in an up market.
Now, I’m not predicting that the stock market is turning over here. I still believe we have further upside. But the markets could continue to process new information in a volatile manner like it has over the last few weeks as opposed to the straight up phenomena we have experienced (and enjoyed) so far this year. I recommend patience and objectivity here as opposed to either emotional buying or selling.