Waiting for the Fat Pitch

06/06/2012 9:56 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The market is too hazardous and the near-term consensus too pat to do much bargain hunting yet, writes Moneyshow.com senior editor Igor Greenwald.

We’re five weeks into the most widely predicted correction in market history: remember sell in May and go away?

With Europe’s suicidal tendencies unfurling alongside tulips for a third straight year, the play’s stuck to the time-tested script. This is the scene where the flight from risk assets lets up a bit on rumors that the politicians care once again.

What could be scarier than waiting for cosmetic fixes to the cancer eating at global demand? Maybe it’s the near-universal agreement that what happens next is as predictable as the recent past. And the corollary that we’re due to be surprised, probably in ways that won’t be pleasant.

The consensus among the talking heads on TV, the trading types on Twitter, and the charts couldn’t be any firmer—and thereby any more suspect. By many measures, the market is overdue for a bounce, yet the receding global appetite for risk suggests any reprieve will be unmercifully brief and unrewarding.

So it’s been written and tweeted, and bleated: first up a bit, then down hard pending some change in the complacent current policies.

Maybe the S&P gets to 1,320, the current waypoint for its downwardly sloping 20-day weighted average. Maybe it nudges 1,326, which would be a 38% retrace of its May wilt. But after that, the bond and commodity markets—to say nothing of economic trends and the mood in the streets—forecast another slumming expedition.

It’s not as if Europe has miraculously come to its senses overnight. Spain refuses to be rescued, though it lacks the credit to save its banks. Germany refuses to rescue anyone except in ways already shown not to work. The G7 ministers discussed, etc. ad nauseam.

And while the US economy is not recession-bound, neither is it exactly poised for takeoff, given the drag from austerity European and domestic.

The Federal Reserve is far from a consensus on what else to try, if and when a majority is so moved, that would do anything but raise the price of gas. So Fed Chairman Ben Bernanke’s Congressional testimony Thursday is unlikely to offer demoralized Wall Street much hope.

All that’s left to figure out is how a consensus in tune with grim realities will be proven wrong, forging the path of maximum frustration.

Perhaps the bounce forecast by the futures overnight develops into a major short squeeze that runs on much longer than supposed. Or maybe the rally is aborted quickly, opening the way for further selling. It’s certainly not encouraging that the CBOE Volatility Index has stalled so far below last autumn’s highs. Option writers seem nowhere nearly as worried as bond buyers or commodity sellers, two groups with a better forecasting record.

My personal preference now is for plenty of cash, a little gold, and some secular growth stocks strongly leveraged to US opportunities. I took a flier on Splunk (SPLK) yesterday after the year’s hottest IPO dropped 26% in a week. On Monday, I bought back some Fortune Brands Home & Security (FBHS) following a 10% correction in two days for one of the best plays on the housing recovery.

But mostly, I’ve been waiting for a better setup. If the S&P levitates toward 1,350 and people start chasing, that will be an excellent time to raise more cash. Otherwise, I’m holding out for a worse panic than we’ve seen so far to do more buying.

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