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Osama is dead, so why no bounce?

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by Peter Switzer

The Dow futures predicted a 0.8 per cent jump in shares as a positive reaction to Osama bin Laden’s death but shares ended in negative territory. So, what gives?

The answer is rationality.

It’s rational to expect a retaliation. It’s also rational that profit-takers will look at the big run up of US stocks this year and say 'let’s pocket some profit', especially as May is sell-off month.

The Dow Jones index dropped only three points to end at 12,807 and so the fear of reprisals and the need to dump stocks were not excessive.

I know my charts guy, Lance Lai, thinks the market is getting set for a sell-off and I suspect he’s right but I’m still very positive for the year ahead.

Debt worries

It’s also rational that investors are worried about US debt with their Treasury Secretary, Timothy Geithner, looking at what he called “extraordinary” steps for the Obama Administration to borrow more.

The US Congress has a roadblock over the deficit and the government’s debt ceiling and it has to be fixed ASAP and this is worrying some investors, though the feeling is that a solution will come at the 11^th hour.

The most rational analysis I saw came from Dan McMahon, director of equity trading at Raymond James who told CNBC, "The fact he (Osama) has been brought to justice, sure, it’s a positive, it’s great for all parties involved ....but in the grand scheme of things it’s a non event — the markets are about earnings and the economy."

Data watch

By the way, oil and gold went lower after the Osama bin Laden news and this affected the shares related to these commodities and that was entirely rational.

On the economics front, the Institute for Supply Management's April reading of manufacturing dropped to 60.4 from 61.2 but this was less than tipped by experts. And construction spending was up 1.4 per cent in April.

Buying opportunity

Rational analysis says the main drivers of share prices have not changed and so it’s rational to expect a sell-off sometime but that will be a buying opportunity as the longer-term view remains positive.

Of course, this view might change. Lord Keynes was once criticised for changing his view and he replied, “When the facts change, I change my mind. What do you do, sir?”

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.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, May 03, 2011

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