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The market pull-back we had to have

Posted By Peter Switzer On In Economy,Markets | No Comments

The only worrying newsworthy aspect of the Dow’s sell-off on Friday was the 205 points it gave up, but that was only a 1.5% slump, which still left the index up 0.1% for the week. Meanwhile, the S&P 500 shed 24.15 points or 1.7%, but it was up 0.3% for the week and 14% for the year.

So, let’s keep all of this in perspective and let me give you a little more to comprehend what’s likely to happen over the next few weeks or even months.

A good sign

Before the worrying stuff, I did note that the materials sector – that’s mining stocks and the like – did finish up for the week and this could be a positive sign for the future, especially given the preoccupation at present is excessively with company results that hark back to the September quarter.

You have to remember that we have had a great run up in stocks since June 4. In Australia, we are up 14.7% and so a pullback has to be on the cards unless the worst is behind us, and even this good old optimist won’t go that far despite a lot of influential experts and investment houses warming to the idea.

I think the worries around Spain, the China slowdown, the US election and the ‘fiscal cliff’ are all brakes on a big stock market surge, but by late December, a lot of these concerns could be KO’d and that’s when we could see some more nice action for share prices.

However, a lot of work involving politicians needs to happen in Europe and the US first, and this has to be a worry for investors.

The sell-off

Friday’s sell-off in the US was related to a string of relatively ordinary profit results, or more precisely, revenue readings. Take GE for example – it met profit expectations, but revenue was down. This suggests profit was a result of cost-cutting, suggesting one of the biggest companies in the world is finding the global economic slowdown a challenge.

Where’s the surprise news there? Both the US Federal Reserve and the European Central Bank spun out their money supplies recently to help growth, so you would expect global companies to show they are having trouble with revenue.

Companies such as GE, IBM and Google have not only had to deal with a slower world economy, but had to cop a higher US dollar, and that has hurt sales as well; but it was a lower dollar that helped them over the past few years.

In general, profits are falling in the US and it’s only logical that the stock market will respond. But smarties look to the future and if the ‘fiscal cliff’ can be beaten by the US president and Congress, then these weaker profits will be ignored.

That said, this will be a huge week in the US with some 150 companies set to report, including big names such as Caterpillar, Boeing and the like, capturing the key institutions that drive the markets. There will also be a US economic growth reading for the September quarter.

My outlook

I wouldn’t be surprised to see some more selling this week because I can’t see that US economic number being super positive given the economic data we saw between July and September.

The chartists are negative, though not excessively so, but we will need to see some surprise good news to stop gravity having its way with stocks in the short-term.

From my point of view, this will be an overdue buying opportunity.

One final point worth thinking about: number crunchers say fund managers in the USA are behind compared with the index and that means they only have about ten weeks to get into the money. If you add this to the fact that many analysts believe in Santa Claus and the rally he usually brings to town, and you’ve got even more reasons to buy on the dips.

This could just be the pull-back we had to have!

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.

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