In Saturday’s Report, I jokingly confessed that I was preparing to do an Imran Khan, who in his cricketing days (and before his turbulent political era) said he would “pounce like a tiger”! You see, I suspect that this current pullback, which some wrongly call a market correction, is just another temporary sell-off and that it’s creating a buying opportunity.

Let’s recap on what’s driving this current negativity. I’ll list the drivers for the sell-off:

1. China’s economic slowdown and property problems are spooking some quarters and it’s not good for mining stocks. That said, the share prices of our big iron ore miners spiked on Friday and Beijing officials are warning not to underestimate China’s bounce-back power as they target 5% growth.
2. Comments from Fed boss Jerome Powell suggested that inflation concerns could lead to interest rate rises ahead. Many had thought there could be one rise at the worst. If rates rise more than is currently expected, then the re-loving of tech and growth stocks will be put on hold and even reversed by short-term traders/investors who play for profit. There’s a persistent concern about inflation being sticky and this isn’t good for stock market confidence as it implies rates remain higher for longer.
3. The bond market took into account this Fed rate rise possibility, which it links to a stronger-than-expected US economy. Yields rose around 100 basis points over the week and the Fed’s latest minutes were behind a lot of those yield moves on government bonds. Rising bond yields and bank interest rates pushed along by the Fed, compete with stock prices.
4. China as the second biggest economy in the world is no help for global growth and this could be another reason for falling stock prices.
5. And of course, there are profit-takers (who’ve done well out of the Nasdaq, which is up 27.96% year-to-date and the S&P 500 is 14.27% higher over that same time) who would’ve been sellers of late.

On my reckoning, China is the big curve ball we must deal with in working out if you should play it safe with stocks or whether you should see this as another chance to buy great stocks at bargain basement prices.

The US inflation story is looking good and while it makes sense for the central bank to keep the lid on excessive confidence by implying that more rate rises could be coming, Powell still wants to avoid a recession, which too many rate rises will create.

The bond market is like a pile of leaves being blown in one direction and then go in another direction when the headwinds become tailwinds. Sure, when bond yields rise, they hurt stocks (as they are now). But when they fall, which I expect will happen in coming months, then one negative for stocks will disappear.

And that would stop profit-takers and encourage profit-chasers to resume buying oversold and over-smashed tech and growth stocks.

You also have to remember that August and September can be seasonally shocking for stocks. I’ve said recently that the first nine trading days of August are historically terrible for stocks, but September is so bad at times that there is what expert market watchers call The September Effect! “The September effect refers to the historically weak stock market returns observed during the month of September. In fact, September has been the worst performing month, on average, going back nearly a century,” Investopedia reminds us. “Some consider the observed weakness in September to be attributable to seasonal behavioural bias as investors make portfolio changes to cash in at summer’s end.”

I think the negativity in this month can be exaggerated but for a century the average return has been negative, so it’s no help when a Federal Reserve has gone mad on killing very high inflation with excessive rate rises in a short period of time. Also, concerns about China and the bond market don’t help.

For my part, I want to focus on the positive when everyone wants to dwell on the negative. This is why I plan to ‘pounce like a tiger’! And I’ll pounce hard, using the BetaShares GEAR product to maximise my gains. But be warned, this geared-up investment product works in both positive and negative directions.

Here’s why I’ll lean against the headwinds we’re seeing now for stocks:

1. I think US inflation will continue to fall. It was good to see this from CNN: “The Consumer Price Index, a closely watched inflation gauge,rose 3.2% in July from a year earlier, up from June’s 3% annual rise and the first time the CPI picked up in more than a year. But the report also showed that underlying price pressures, such as core inflation, continued to decelerate”.
2. On rate rises, this from bankrate.com is supportive for stocks: “Economists’ average forecast in Bankrate’s second-quarter Economic Indicator poll estimate that the Fed will follow through with one more rate hike, with the federal funds rate peaking in a target range of 5.5-5.75 percent. Investors, however, still predominantly assume the Fed is done”.
3. Being close to the top on rising interest rates augurs well for the December quarter, which is a great period for stocks and often rolls into a solid January. “The monthly historical returns of both the S&P 500 Index and the Dow Jones Industrial Average show that the best months for the stock market are November, December, and April. The months of October and January also performed well but not as well as the months of April, November, and December,” reports therobusttrader.com.
4. The fourth year of a US Presidency is the second best for stocks, and if rates are being cut next year, that’s going to be a plus for share prices.
5. Finally, I don’t think China will allow its economy to become an embarrassment for both economic and political reasons. Already, the People’s Bank of China cut interest rates on one-year medium-term loans by 0.15% to 2.5% in an effort to kick-start growth. And even though its property giant Evergrande Group has filed forUS bankruptcy protectionas part of one of the world’s biggest debt restructurings, I’m in the school that says China property is “too big to fail”.

The Washington Post reported recently that China’s Government “…has taken small steps to boost demand — trimming key interest rates and making it easier for more people to buy homes — but Beijing has so far held off from taking large-scale actions. Faith in the market remains shattered, tanking already low confidence among consumers at a time when the world’s second largest economy needs spending to stave off a slowdown.”

Xi Jinping can’t afford to have his country/economy look like a basket case and he will come to its rescue.

That said, I’m not rushing to buy just yet, but I will watch the news and data drops and be ready to ‘pounce like a tiger’ on assets I want to hold for the long term. As for GEAR, which is a speculative play, I’ll hold it until it gets around $30 and then think about exiting it.

Warning: If you’re thinking about GEAR, do your homework and go into it with your eyes wide open.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances