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A Good Buying Threshold

08/20/2013 1:00 pm EST


Sam Stovall

Chief Investment Strategist, CFRA Research

The recent increase in volatility has some investors concerned yet S&P's Sam Stovall shares his outlook for the next few months and what he sees as a buying threshold.

NANCY: Hello, and thanks for joining us. My guest today is Sam Stovall. Hi Sam and thanks for being here.

SAM: Hey Nancy, my pleasure.

NANCY: You know we have had a really good run in the market lately, but then August 15, the Ides of August, I should say, the market fell 225 points, so what do you think? Are we just going to continue being volatile? Are we at the end of the Bull Run?

SAM: Well, I don't think we are at the end of the Bull Run. I think you have to realize that August is the third worst month of the year for the S&P 500, so it normally doesn't do well because investors are focusing more on their tans than their portfolios, and if you think August is bad, just wait till September; that is the worst month of the year for the market. I also think investors were a little bit lulled into a bit of complacency because in the first half of this year, we only had 12 days in which the S&P declined by 1% or more, yet annualized that, that is 24, but we have averaged 40 per year since 2000. So we would need to see a doubling of what we had in the first half to occur in the second half in order for us just to get back to the average over the last 12 years. I would tend to say yes, fasten your safety belts, but don't open your parachutes and assemble by the door.

NANCY: Right, so but you think in terms of volatility, do you think it is going to be like wide swings or we are just going to have these, you know, 100-150 point days and then up one day and down the next?

SAM: Well 225 points, while it sounds bad, is certainly not as bad as it used to be. That represented less than 1.5% of the Dow Jones Industrial Average, so usually we would measure volatility in the number of 2% days, but now we are not getting those either; we have had only three in the past 12 months and normally we have 15 going back to 2000 that you pretty much give up on 2% days and you focus exclusively on 1% days, and even then, we are looking at a very small number.

NANCY: Well the good part about that is you can buy low, right, and sell high on the next cycle.

SAM: Exactly, so if you are one that has money that you want to put to work, you don't want to put it all to work, because you are convinced the market will know that you did, and it will instantly then go down. I actually say take a look at 5% thresholds; those do tend to represent good buying opportunities because we have had so many of them over time and the price decline that averages between 5 and 10% has declined on average 7%, so that represents a good buying threshold.

NANCY: Sure, that is excellent, and then what is your target for the S&P for the end of the year?

SAM: Well, the investment policy committee, we usually have 12 month targets and our 12 month target is $1780, so if you annualize that, that is around the low 1700s for this year, so yeah, we are in the 1700 club and we still believe that, even though the S&P fell substantially in mid-August, and also, the Dow fell that 225 points, as you mentioned, there is still a possibility that we break once again above $1700 on the S&P before we slip into something a little deeper.

NANCY: Super, well thank you for joining me.

SAM: My pleasure.

NANCY: And thanks for being with us on the video network.

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