FYI | Apr 16 2014
By Peter Switzer, Switzer Super Report
So how worried should we be about the latest stocks sell-off in the US?
The big clobbering has happened to the Nasdaq, which houses the momentum stocks, such as Netflix, Twitter, etc, and here the loss was more worrying. The high-tech index was down 3.1% last week and has tumbled 8% since its six-year high of 4357.97 on 5 March 2014.
This is hovering close to correction territory but that's all understandable considering the share price rise for some of these stocks that are not even making profits!
Partly powering this sell-off are hedge fund managers, who are feeling the heat with share prices diving and these guys add to the momentum.
Valuation evaluation
But could all of this concern about companies with silly valuations being sold off worry the normal investor? Should we heed Marc Faber, who again is talking about a 20% market crash this year? This guy has been wrong for ages – Google my name and his – but one day he will be right, I just don’t think that day has to be in 2014.
When someone makes bold market predictions, they need to explain their thinking, so we can test it out, so we can treat them seriously.
All markets end in tears but with the biggest bond company in the world, PIMCO, now publicly telling everyone that it’s long stocks and that stocks will outperform bonds, you know Faber is seeing something other smarties can’t see.
Maybe Faber is perceptive or he is seeing things!
Others see a US economy growing at 3% plus this year and that should help stocks.
Chief economist at Moody’s Analytics, Mark Zandi, looked at recent US job numbers and then went public tipping growth of 3%, adding that full employment was possible by 2016 or 2017!
This is a much more rosier scenario than good old Faber.
Time for rotation
I think we are simply in a rotation period, out of stupidly-priced stocks into ones that have been unwisely rejected, as the excitement for hi-tech stocks went higher and higher.
I can’t see the trigger for a major slump. We have not participated in a hi-tech boom in Australia, so our market will be driven by Wall Street, the Fed, Chinese economic data and the odd concern about the shadowy shadow banking system in that country.
At the moment, every central bank in the world knows that they can’t derail the burgeoning economic recovery and so actions will be taken to keep interest rates low enough to help economic growth happen. We saw it a couple of weeks ago when Janet Yellen told a conference in Chicago that the US economy would be getting help to make it grow, despite what it has already committed in the recent past.
“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed,” she said in the speech.
And the market loved it.
I assure you that I will stop being bullish and telling you that a buying opportunity exists when the economy refuses to be stimulated by this easy money policy we are seeing right around the world.
Growth is the key and later this month we see an important US growth number, which, of course, has been affected by the bad weather. Jeremy Siegel, who is a finance professor at the University of Pennsylvania's Wharton School, has an 18,000 call on the Dow but it is linked to economic growth, underlining the importance of growth.
"We need to see some acceleration," Siegel told CNBC. "This first quarter, when we get this announcement later this month, it's going to be terrible. I think it might be around 1%. What the market is hoping for is 3.5% and 3.75% at least over the next three quarters. There will be disappointment if we don't get that.”
That said, he added this really important line “but I don't think that will mean a bear market or a serious sell-off."
Still in the game
I have always argued that short-term traders can create great buying opportunities for long-term investors and that’s where I think we are now. As I say, one day I will turn but that time has not yet arrived.
For those interested, Lance thinks the US market could be softer, looking at the charts, but he says our market seems OK. Meanwhile, Gary Stone of Share Wealth Systems says the market “would be up there with the toughest market periods that I have traded” but he is still in the market.”
Stone’s investing technique involves reading the trends and he doesn’t care if he is late getting in or out, so long as he positions himself to win after some early losses. As I often say “ the trend is your friend until it bends” and that’s what Gary is good at picking – the bending of the trend.
Back in August 2010, when I was arguing that stocks were still the right place to be, despite PIIGS problems in Europe, I used an Alfred E. Neuman line — “What? Me Worried?” – and it still applies today.
We are not yet in the euphoric stage of the stock market, though the clowns buying Twitter might have been, the rest of the stock market is a long way from when cab drivers stop asking for tips and start giving them.
I must say my Greek lawyer, who is long property – what Greek isn’t? –actually asked for stock tips on Saturday and that made me think I’d better start catching a few more cabs!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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