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Buy the dips

After a fantastic start to the year on the stock market, it was always going to be challenged by something. And that something has come along with weak March job numbers in the US helping to spook investors who had pushed up Wall Street to the best start to a year in 14 years!

Sell in May?

But with worrying signs out of Europe, China and even the USA, is it time to turn tail and run? And is it time to heed the old warning that has worked out many times in the US — “sell in May and go away?”

I guess if you’re a trader you would sell, but you would be watching for the signs that last year told you to definitely stay away until October, after which it was get-back-in time.

The icing on the cake last year was the European Central Bank (ECB), which threw one million euro at European Union (EU) banks in the form of loans at one per cent for three years! How could they resist it?

This stunt made debt concerns linked to Greece less of a problem because the banks that were exposed to the Greek debt drama became insulated from the consequences of any default. That ECB play, I would argue, is the biggest difference between 2011 and 2012 and it has made me more confident about arguing that buying the stock market dips is a good strategy for this year. In fact, I was recommending this last year and it was a good play but it looks even smarter this year.

Use the force

I feel a bit like Obi-Wan Kenobi advising Luke Skywalker in Star Wars to “use the force” in advising “ buy the dips”, and I’m happy with that imagery.

For too long the ‘evil empire’ forces of hedge funds and short-sellers have held stock markets and sovereign debt markets to ransom but since the ECB wised up and expanded its money supply, financial markets have started believing that Armageddon was avoidable.

Disappointing jobs numbers

So what’s making everyone so jumpy now?

US job numbers disappointed over the weekend — in fact they came out on Good Friday while the stock market was closed — and with predictions that the upcoming earnings season in the States will be disappointing, it has created a perfect sell opportunity for short-term traders.

Regular readers know I have been tipping a pullback for some time but I maintain my view that this year will not be a rerun of 2011 where we saw a massive slump in shares in August and September. 

Left-field events?

That said, there could be a left-field event which I cannot see right now. If I had to list them, I would say there could be a PIIGS debt default concern, but I don’t think so since the ECB’s action means this is less of a worry compared to last year. Next it would be Iran and the oil price spiking, threatening a global recession, but my geo-political sources say this could fester along until the US presidential election is over and so it could be something for 2013.

Some might throw in China but I think it’s already showing signs that we can rule out a hard landing.

That’s about it and convinces me that we’re looking at a correction from the big run-up of the markets since October 2011, and especially since the start of this year.

Quantitative easing

If you look at charts of US indices, quantitative easing (QE) 1 kicked off the first big rise in stocks in 2009, then in 2010 along came QE2 and this was followed by Operation Twist where the Federal Reserve bought long-dated bonds to lower long-term interest rates and they paid for it by selling short-term bonds.

Some experts think QE3 will come along to help the market but that would only happen if the US economy fell into a hole. I can see a slowdown, and in fact RBS Morgans’ chief economist Michael Knox says his economic modelling is tipping a slower US economy in the second half of this year.

Buying opportunities

My view is we’re looking at an overdue pullback where there will be buying opportunities on the dips. JPMorgan’s US equity strategist, Thomas Lee sees it the same as me.

He told CNBC that the negative jobs report that showed 120,000 new positions compared to the expected 203,000, is a little misleading as a predictor of the jobs market. He thinks the trend for weekly jobless claims is more reliable and this has been telling a more positive story for the US economy.

He expects “growth scares” over the next few months coming from Europe and China and now the US job market concerns have arrived. However, against this he sees a housing recovery happening, companies with solid balance sheets with plenty of cash and low debt, and with valuations at 60-year lows.

On the earnings front

There are other causes for some jumpiness right now and US Tax Day on 17 April is another reason for shares being sold off. Also, as I said earlier, a poor company reporting season is expected for the Yanks but Alcoa — the world’s greatest aluminium producer and often seen as an omen stock for the market — reported miles better than expected. Analysts tipped a four cent a share loss but it turned out to be a nine cents a share profit.

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

Adding to optimism

Meanwhile, the recent Chinese data makes the case that China will avoid a hard landing and this adds to my optimism.

In summary, expect some anxiety and sell-offs over the next few months but by year-end there will be rallies. Of course, the next three weeks puts the latest round of company reports into sharp focus.

By the way, I expect interest rate cuts in coming months and a lower dollar locally, which actually could help our stock market.

And this is why I’m advocating that “buying the dips” is the strategy for 2012.

For advice you can trust book a complimentary first appointment with Switzer Financial Planning today.

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.

Published on: Monday, April 16, 2012

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