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A bad day on Wall Street

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by Peter Switzer

Wall Street had its worst point-decline day of the year but that’s not much of an achievement given this had been one of the biggest run-up of stocks in 14 years in the USA. That’s precisely why I have been tipping a pullback was on the cards — markets can’t go up forever!

The challenge for us is to work out how you should play this sell off.

For those who like to know the score — the Dow dropped 213.66 points, or 1.71 per cent, to 12,715.93 and so it is a pretty serious sell-down and it will whack our market today as well. Meanwhile, the S&P 500 was down 23.61 points, or 1.71 per cent, to end at 1358.59.

So what were the causes?

Higher yields in Spain and Italy brought in the usual suspect of Europe but stock markets there were reacting to the poor jobs numbers out of the USA over the weekend. They had a four-day break, which means their markets were playing catch-up.

Also US Tax Day happens, weirdly, on 17 April and this can often lead to share sales for tax purposes.

On top of this, Wall Street has also been affected by predictions of a bad earnings period ahead and combined with the fear that there will be no QE3, this has made it easy for professionals to start dumping stocks.

But true to form, which has shown the US economy has confounded the negative experts, Alcoa — the world’s greatest aluminium producer and often seen as an omen stock for the market — came in miles better than expected. Analysts tipped a four cents a share loss but it turned out to be a nine cents a share profit.

How to play the negative market

So, how do we play this negative market?

Firstly, I think the Yanks will do OK earnings-wise and economically and that will put a floor under the market. Second, Europe now has banks with one trillion euro worth of cheap loans and this will put a floor under Euro-panic. China will have a soft landing and that will help global growth, which means the chance of Armageddon is reduced.

I like sticking to dividend stocks for the moment but I’m on the lookout for great small cap companies I want to own over the next three years or so. When a bull market is accepted by most investors, there will be a big share price take-off but we’re in for a testing period over the next few months.

The news flow will determine direction but where in 2011 we tended to see news head to the negative most of the time, I’m punting that we’ll get more positive headlines helping stocks.

Frankly, I liked the commentary from Alcoa’s CEO, Klaus Kleinfeld, who basically said Europe had its problems but confidence was up even there and China as well as the US were looking promising. And get this, he tipped there was rising demand for his product, which has to be a positive sign.

Buy the dips

My belief is that earnings are on an uptrend in the US and when we see some interest rate cuts here we might be able to join the party. I’m expecting at least two cuts this year but if we don’t get them, our stocks will lag behind Wall Street and the Gillard Government will be belted in the next election and the RBA will be an accessory before the fact!

I know I said it last year but it applies again this year — I will be buying the dips because it’s a good strategy.

Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, April 11, 2012

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