Market Direction: Buy or Sell – Buy and Sell?
Showers or Clear Skies on the Horizon!
by Ian Harvey
April 01, 2013
It is quite obvious that the stock market camp is divided into areas of thought for April – and has various reasons for their thoughts as to where the stock market is heading.
Therefore, where does this leave us? -- Buy or Sell – a difficult decision considering the arguments presented by both sides of the fence or in some cases those playing both ways!
Let us examine some of these compelling reasons which may help you decide whether you will buy or sell or buy and sell.
As we start the new week of April, seasonal factors are likely to create a very volatile stock market, taking investors on a roller coaster ride. That’s despite the two underlying bullish realities:
• The Fed is pumping up stocks with their quantitative easing program, and
• Companies are shrinking the float of shares at about $2 billion every day.
After a month of teasing investors, the S&P 500 closed at a new record high on Thursday. Is this indicating that it is time to take the money and run?
Maybe not, but keep in mind some technical strategists say they expect a pullback of 2% to 3% before the index of large-cap U.S. stocks pushes to higher highs by year-end.
So, let us now examine, in more depth, the reasoning behind each point of view:-
U.S. stocks may seem ripe for a pullback, as Europe's debt problems have returned to the limelight. But experts aren't anticipating a spring slide in the stock market for a fourth year in a row.
In fact, even though the Dow and the S&P 500 are at all-time highs, stocks are not at a peak yet, stocks are still cheaper than they were at the peaks in 2000 and 2007.
Valuations are lower now than they were at previous bull market highs because company earnings are stronger. Plus, interest rates are far lower than they were in 2000 and 2007. The 10-year Treasury yield is around 2%, compared to around 4.5% in 2007 and 6% in 2000.
Barring any major shocks, expect investors to start putting more of their cash into the stock market and even begin to shift their money out of bonds and into stocks.
The expectation for U.S. stocks is to return between 6% and 8% a year for the next five years.
Even though many investors are bullish for the S&P 500 for the long term, they see too many negative market factors in the current run that appear to be setting up for a pullback.
Those negative factors include the deteriorating percentage of NYSE-traded stocks above their 50-day averages in recent weeks, and more corporate insiders adopting defensive postures. Also, a rosy market sentiment that’s shown the lowest percentage of bears since May 2011 suggests that the market has become too overconfident.
For the most part, retail investors, many of whom have sat on the sidelines, are still wary of the rally, that it could be a classic bear trap, where heavily invested institutional investors start profit taking once the retail investor buys in at record highs. Even with that reluctance, flows into stock funds have been positive for 11 weeks straight, their longest streak since 2010.
Several factors suggest a correction may not be far off, even while the new high provides a big psychological boost to an already confident market.
Conclusion for Buy or Sell in April
For investors who have ridden even part of the massive upswing since stocks bottomed four years ago, the threshold can also act as a reminder to do some portfolio spring cleaning. In other words, figure out how much you can afford to lose if this is a peak — and whether you’ve become overly concentrated in one type of investment. Also, seek further direction in regard to the aspect of buy or sell or buy and sell
For most people passing a certain level in and of itself doesn’t cause you to rethink your strategy but it is a milestone; it does cause you to stop and evaluate where you are and where you come from.