Insights & Advice

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The Market needs a Time Out

The bulls are tired. After four days of pushing the markets higher, even the most aggressive investors are taking some profits at least for the next day or two. However, if the number of client phone calls I have been receiving on Thursday and Friday are any indication, I suspect that the markets will break my S&P 500 target of 840 on the upside.

“So should I put some money to work?” asked a Boston client on the telephone from his winter home in Florida.
This was an investor who is largely in cash and income funds and while the markets are still down for the year, he actually made a little money.

My answer was yes but I advised him to invest conservatively because the markets could roll over and re-test the former lows (666 on the S&P 500) at any time. They have done just that several times since this correction started most notably in October and November of last year and once again in January, 2009.

“But isn’t this different,” asked another client, hot to trot and wanting to put every cent into emerging markets.

A recovery is not build on a few good numbers or in one month of economic data. Granted new home sales and consumer spending were higher as was consumer confidence but from reduced expectations. The point is that the recession is not over; job losses are mounting. Just think of how many people you know in Pittsfield, Adams or Albany who have been laid off?

Despite U.S. Treasury Secretary Geithner’s private/public toxic asset disposable program introduced on Monday, more banks will fail; billion dollar write-offs and bail-outs will continue to occur as will the pace of bankruptcies. The point is there will be many more ups and downs in the markets over the next few months before we are out of the woods.

“Do I believe we have made a market bottom,” another client asked.

The answer is one of those “Catch-22” parables. The only way one can determine if we made a market bottom is to re-test that bottom once, twice or even three times. If stocks refuse to go lower from that level, then I can say with some confidence that the bottom is in. Yes, my reader, that implies that the stock market must go back down to the 666 level on the S&P500 before you can invest with impunity. In the meantime, invest with caution. Buy income funds or if Tarzan calls and the jungle beckons then at least stay with blue chip stocks or better yet growth mutual funds rather then penny stocks or emerging markets.

As for next week, we have a chance to move above my 840 target if we pullback or at least flat line for a few days. The markets are overbought and quite extended. If we pullback 30-40 points on the S&P and then move higher, I think the index could get to 900. That would tack on another 50 points to my target. It would also be the best rebound off the lows we have experienced so far with a 35% gain in less than four weeks. Now that would be some bear market bounce. Those are big ifs but certainly doable especially if some of the clients sitting in cash on the sidelines decided to put a tow in the water.

Posted in A Few Dollars More, At the Market