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Fear is still rising but stocks look oversold
08/03/2011 1:56 pm EST
I haven’t heard anyone breathe the phrase but we’ve come close this morning.
Here’s Mr. Bond, Pimco’s Bill Gross yesterday on Bloomberg TV: “We’re not looking at a recession yet, but we’re at a tipping point.”
And here’s Harvard’s Martin Feldstein, chairman of the Council of Economic Advisors to President Ronald Reagan: “This economy is really balanced on the edge. There’s now a 50% percent chance that we could slide into a new recession.”
I love the smell of fear in the morning. It usually signals that a buying opportunity is approaching.
Through yesterday the seven-day slide (continuing so far today) has wiped out the total year-to-date gain in the Standard & Poor’s 500 and erased $1.1 trillion in U.S. stock market value. Yesterday’s 2.6% drop in the S&P 500 is the biggest loss in a year, and this seven-day downturn is the longest losing streak since October 2008 in the depths of the global financial crisis.
Technical indicators are now reading “oversold” with many showing the most oversold reading since July 2010. The S&P 500 bottomed on July 1 at 1027 that year. The subsequent rally took the market to its April 27 peak of 1356 on the S&P 500 for a 32% gain.
The problem with oversold readings is that an oversold market can get even more oversold before it begins to rally. And frankly the news flow seems loaded with bad news in the short-term. For example, there’s what looks like a good chance of stinky jobs numbers tomorrow in the report on initial claims for unemployment and then on Friday in the payrolls and unemployment reports. The consensus among economists is that the economy added just 84,000 jobs in July. That would be an improvement from the 18,000 added in June but still far short of the number needed to cut into an unemployment rate of 9.3%.
And I expect that euro debt crisis to keep delivering, well, a crisis. Bond yields above 6% for Italy and Spain are frightening since they say those two countries will need a bailout.
I don’t disagree with those who say the U.S. economy is growing dangerously slowly or those who point out that the recent debt ceiling deal will further slow the economy. But company earnings this quarter—especially for companies with substantial overseas sales—have been reasonably strong. Stock valuations are at the low end of reasonable. And low and falling bond yields support higher stock prices at some point.
So far we haven’t broached levels—11,555 on the Dow Jones Industrial Average and 1246 on the S&P 500--that have been support for a stock market that has been stuck in a range for the last few months.
I’d still like to see more fear—a few uses of the “apocalypse” word, for example—before I start buying, especially because it is, well, August and August and September are historically very hard on stocks. But at this point, while I’m still keeping my powder dry, I’m closer to buying than to selling. There aren't a whole lot of good growth opportunities among stocks right now but that scarcity value is itself very attractive.
I’m working on as list of growth stock opportunities now that I’ll post here on Friday morning.
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