Investors See Changes in the Wind

05/04/2010 5:01 pm EST


Jim Jubak

Founder and Editor,

Do you feel the psychology of this market changing?

A few weeks ago, I think you could have accurately said that investors on the sidelines were waiting to get into what they saw as a continuing stock market rally. I think that was true as late as April 15 (when the Standard & Poor’s 500 index was at 1212) or even April 23 (when the S&P 500 was at 1217).

But now, on Tuesday, May 4, I think it’s fair to say that many investors in the market are looking for a day to get out.

And I don’t think it’s just because the S&P 500 is down a piddling 3.5% from April 22 to May 4.

Some of these folks were planning on getting out later in May or June, when earnings season was over and the stock market was ready to slide into its summer doldrums. Now it looks as if moving sooner rather than later was the better strategy, and they’re worried that they missed their chance to get out. (I don’t know why I’m writing “they” here; I belong in this group. I was waiting for the end of May to trim some positions.)

Some have been freaked by the crisis in Greece, the fraud charges against Goldman Sachs Group (NYSE: GS), the impending crisis in Spain, the shellacking that the huge oil release in the Gulf of Mexico has delivered to many energy stocks, or whatever. They’ve just decided, again, that the stock market is too risky. (I’m not saying these investors are wrong, by the way.)

And some, while not freaked, have decided all the trends they see over the next six months (or longer, if you’re a pessimist or realist. You know the difference? You’re a pessimist if your fears turn out to be overblown, and a realist if they turn out to be correct.)

The European Union is moving from a small Greek debt crisis to a much larger Spanish debt crisis (see this recent post). China is determined to slow its economy (see this post). Brazil and India (and much of the rest of the developing world) have decided to raise interest rates to fight inflation (see this post). The US economy is growing, but 3.2% GDP growth, the figure for the first quarter, isn’t exactly going to set the world on fire.

Those trends—European crisis, stepping on the brakes in China, higher interest rates in emerging economies, decent but not stellar growth in the United States—really aren’t any different from what I’ve been telling you to expect for 2010. What is different is the market reaction: Instead of buying on the hope that somehow a stock or sector will thread the needle and find the narrow opportunity among all those worries, investors are now looking on good news as a chance to exit from a market beset with woes.

What does that mean for you?

If you’ve been waiting to sell until later in May or June—after an earnings announcement or some news event—rethink your timing. I don’t think this market will deliver much of a bounce on good news, so instead of waiting on the event, wait for one of those reaction rally days to do any of the selling that you had planned.

Look around for bargains among growth stocks. Stocks really aren’t responding to good news with higher prices right now. And many that jumped on good earnings news in April have just about given back all of the bumps. Cummins (NYSE: CMI), for example, has lost pretty much all of its post-earnings gains. Teva Pharmaceutical Industries (Nasdaq: TEVA) has sold off on relatively minor bad news and got no bounce Tuesday, when it announced earnings per share two cents above the Wall Street consensus.

I don’t see any need to load up here, but using some of the cash that you realize from selling to buy selected stocks that you passed up just because they were too expensive would be reasonable.

But keep some powder dry. I don’t think we’ve seen the end of the crisis in Europe, or worries about growth in China, or interest rate increases in emerging markets. I think there’s a good chance that you’ll see better bargains in emerging markets, especially later in 2010.

Just remember that in bargain hunting, as in any other part of investing, it doesn’t pay to be too greedy. The US market hasn’t yet broken major support; it’s merely testing. That can be scary enough, but so far, to me at least, the US economy looks strong enough to keep this from turning into a stock market rout.

Full disclosure: I own shares of Teva Pharmaceutical Industries in my personal portfolio.

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