Spinning right round – chartists say pullback, but don’t forget rotation signs

Founder and Publisher of the Switzer Report
Print This Post A A A

Following the massive run up in stocks since mid-2012 — over 20% — and since mid-November — over 13% — the charts are telling us a pullback is on the cards. Meanwhile, other experts are invoking the wise, old owl lessons of Warren Buffett, which tell us to be fearful while others are greedy and vice versa.

That said, Buffett is not a trader but a long-term investor in quality companies — he just likes to buy when these companies are cheap and that’s his stand out characteristic compared to the normal investor. Want proof? Well, answer this question: Did you buy CBA at $24.03 on 23 January 2009? Or in the year that followed, when it was $26.45 on 6 March 2009 and, eventually, climbed into the $30-range, were you a buyer?

In all likelihood, you gathered courage over the ensuing years. While there are still people on the sidelines in cash, there is a rotation out of cash, term deposits and bonds into stocks. Right now there are chartist warnings that say this market surge has been too quick and then there are the logical market experts who think this is a great time to take profit, and no one went broke taking profit. However, these people can miss a lot of capital gain.

So why did Wall St have such a good day at the office last Friday, with the Dow crashing through the 14,000-level, for the first time since October 2007, and rising nearly 150 points?

Well, it’s kind of simple — economic data plus corporate earnings plus expectations of more quantitative easing (QE) from the Federal Reserve — and then there’s rotation from those investors who think they’re missing the start of something big.

On the economy, non-farm jobs were up 157,000 in January, while the previous two months were upgraded by 127,000 jobs. Unemployment actually went up from 7.8% to 7.9% and that would keep QE-urgers in there, sweating for more money from the Fed.

Meanwhile, the Institute for Supply Management Manufacturing Index was up strongly from 50.2 to 53.1 and construction services also ticked up but by only a small amount — 56.1 to 56.2. However, consumer sentiment was up from 71.3 to 73.8 and that’s significant!

So the economic data is looking good but the Yanks received a weaker than expected GDP number for the December quarter  —shrinking 0.1% annualized — but this came with a big cut in US government defence spending, and there was Hurricane Sandy, an election and the fiscal cliff fears all in that quarter. No-one is seriously saying this is the start of a new recession for the Yanks. But this also keeps those hoping for more QE to power both the economy and the stock market very positive on shares.

Rotation vs. chartist

On the rotation versus chartist argument, there are increasing signs that the rotation is happening, but it’s not an avalanche, and March and the US Congress could pose some problems for stocks.

On March 1, the so-called sequester kicks in, which is $65 billion of automatic spending cuts that will start unless Congress agrees to an alternative plan. The battles on Capitol Hill could spook the stock market.

Against this, a Spectrem Group survey found that confidence of millionaires in the economy was at a two-year high, and it was the economy and company earnings that were behind this confidence.

Right now the rotation is starting, but it isn’t huge, and so a pullback is still a damn good chance, but it would only be a buying opportunity as I believe in this rally baby!

I like this take by Scott Wren, senior equity strategist at Wells Fargo Advisors, who gave this to CNBC.
“I would say in the 30 years I’ve been watching it, this is the least amount of retail interest waiting for a pullback, or waiting to jump in that I’ve ever seen,” he said. “Probably and unfortunately for a lot, it’s going to be a lot higher before they get in.”

I don’t think investing now is like the Irish bomb sweeper who tippy toes across the minefield with his thumbs in his ears! No, I think most of the bombs have been cleared but it still won’t stop a pullback. Whatever happens, it won’t be a disaster.

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.

Also in the Switzer Super Report:

Also from this edition