Last week in Bracing for a Breakdown we wrote that the market seemed to be hinting that its correction was not yet over, and that investors might be wise to approach equities with caution. Since then the Dow is down about 400 points after trading down four of the past five days.
While this correction may not be over yet, as the market moves lower the chances of prices continuing lower will diminish. In other words, since the market is lower than it was last week, the chances of it continuing down over the next week are relatively lower.
After all, between the Flash Crash earlier this month and the market’s recent correction, market prices have come down significantly. Investors need to remember that corrections, like bubbles, don’t last forever.
Even more importantly in looking forward, the market has not declined in uniform fashion. Some sectors have experienced declines far more dramatic than others. As an example, oil stocks have been hit far harder than those of companies which mine precious metals. Whichever of these two sectors seems better, given the circumstances, is a matter of basic investing philosophy.
Given current price and earnings levels, equities in aggregate are certainly not cheap – hence the calls for a correction. However, there are some sectors of the economy whose prices may represent buying opportunities. Money managers with a sector-orientation spend considerable time looking for such opportunities and take advantage of them whenever possible.
Since the correction began, there has been a growing level of uncertainty in the market. Before the market started down, sentiment among professional money managers was approximately 80% bullish. It took just 13 trading days for that number to fall to 45% BEARISH. What this means is that advisors began by recommending that their clients be 80% invested in the market, to recommending 13 days later that clients use 45% of their portfolios to short the market (bet that it will go down)(The Bearish Bandwagon, Hulbert, MarketWatch.com).
During the same time the S&P 500 Volatility Index (VIX) experienced a sharp rally, indicative of increasing worries about the market’s prospects going forward. Granted, of course, the VIX had declined before the crash, to pre-2008 levels, revealing a great deal of complacency in the market. Since its recent rally, the VIX has reached levels only attained four times in the past ten years, each of which represented relative buying opportunities.
Also contributing to growing uncertainty are geopolitical circumstances currently emerging around the world. While the troubles facing Europe, the potential breakdown of the European Union, the oil spill in the Gulf of Mexico and the prospects of sweeping financial reform legislation coming out of Washington are becoming old news, there are new stories developing every day.
Case in point: Tensions between North and South Korea are flaring up again in spectacular fashion. Of course, let’s also not forget the recent violence in Jamaica or recent political turmoil as election season approaches. Included therein are the accusations Pennsylvania Democratic Congressman Joe Sestak has leveled against the Obama Administration, whose approval rating continues to fall (charge which could prove to be an impeachable offense, if substantiated).
While the markets are obviously facing considerable obstacles going forward, there have also some great developments that shouldn’t be underestimated. First and foremost, the manufacturing sector appears to be continuing its recent improvement, particularly in the United States as the recent trend of “on-shoring,” which we first mentioned a year or so ago, begins to pick up steam.
In fact, there have been several stories lately of Chinese businesses opening plants HERE because they are more economical. Who would’ve thought they’d ever live to see the day when the Chinese turned to Americans for our cheap manufacturing?
The world in which we now find ourselves is most certainly an interesting place. Whether from an economic, financial, geopolitical, or industrial perspective, the world is constantly changing. Although it’s certainly difficult to assemble the ever-changing pieces of a faded puzzle, the task remains necessary none-the-less.
This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.