Wall Street has convulsed at the prospect of President Barack Obama having to talk around a Republican-dominated Congress with the US economy creeping ever closer to the so-called fiscal cliff that will undoubtedly create a recession and send stock prices plummeting.
Since October 4 the S&P 500 index has gone from a high of 1461.4 to 1359.88 — that’s a 101.5-point drop or 6.9%. Meanwhile our S&P/ASX 200 has given up 115.6 points or 2.6%.
Regular readers know I have been tipping a pullback was on the cards given the nice spike in stocks from around July, which was then turbo-charged from July 26 when the European Central Bank boss Mario Draghi pledged to do “whatever it takes” to save the eurozone.
In this newsletter both Lance Lai, more than a month ago, and just last week Gary Stone also gave us technical reasons to be ready for a significant sell-off.
So the hip-pocket question for investors is just how bad will it be for stock prices before the Yanks settle their fiscal frictions.
I’m working off two assumptions, which I totally believe in. The first is that they will settle this before Christmas because neither side can afford to be accused of driving the US economy into recession.
The second is that stocks will go nicely higher once a reasonable negotiated outcome arrives.
The challenge for us is just how long do we wait before we start getting back in, if you cashed up ahead? Or if you held your stocks, waiting for the buying opportunity to bring down your average cost of holding the companies you like, when do you start the purchasing process?
I am in the latter boat and this is a guessing game because one silly “line in the sand” assertion by Obama or the Republican’s John Boehner could re-spook markets.
The Saturday morning close, our time, of Wall Street was positive and the reason was some positive stuff coming out of Washington. The Dow was up nearly 46 points or 0.37% to 12,588.31 but this is a long way from the 13,930.1 we saw on October 31, 2007 and so maybe we should take our lead from the Dow.
What is interesting is that panic is controlled with the VIX or fear index at only 16.42, where a reading of 14 or 15 is consistent with a ‘no worries’ market.
The market liked this from Boehner: “I believe that the framework that I’ve outlined in our meeting today is consistent with the President’s call for a fair and balanced approach. I believe we can do this and avert the fiscal cliff that’s right in front of us today.”
For my part, I am going to start watching the stocks I want more of — materials, given Ron Bewley’s analysis, which you can find on our website — and I am always looking for great companies at lower prices that pay good dividends.
I know I could get caught out with another leg down but I am going to start watching the companies I want like a hawk over the next few weeks. I suspect if you wait too long, you could miss out on the kind of value you get when you take a risk.
On the flipside, people like Gary Stone are always prepared to miss the first bit of a new uptrend but will get in as soon as they think the turnaround is complete. Gary will contact me when he sees that, and I will let you know.
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