With the S&P 500 at its highest level since the summer of 2008, investors previously sidelined by reoccurring fears of a double dip recession and nagging worries about a disorderly Greek default may now be tempted to hold their noses and dive into the market where, presumably, they will be swept along to the land of outsized profits by the Dow 13,000 wave. Having said this, it is worth noting that often the best time to sell is when everyone else is buying. Now may be that time. [Let me explain.] Words: 885
So says Colin Lokey (http://blog.lokeyisstreetsmart.com/) in edited excerpts from an article* posted on SeekingAlpha.com which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
Lokey goes on to say, in part:
The bull case. To the casual observer, it is easy to think that the economic recovery is back on track and Europe has finally put its problems behind it. There is some merit to this point of view:
- The unemployment rate has dropped to 8.3%. Last month’s non-farm payroll report showed the economy added 243,000 jobs in January, 93,000 more than economists’ were expecting. The gain was largely the result of a substantial uptick in service sector jobs which is key, as many analysts believe that manufacturing alone cannot fuel the economic recovery. The brighter employment picture seems to be making Americans feel better about the economy as consumer sentiment surged to its highest level in a year in February. Additionally, manufacturing activity as measured by the ISM, hit its highest level in half a year last month.
- A disorderly Greek default has been averted, at least for the time being, and the ECB’s Long Term Refinancing Operations seem to have succeeded in stabilizing the market for Italian and Spanish sovereign debt…
…The bear case, however, has several components:
1. The geopolitical component. Currently, there are two significant political problems that, when taken together, have introduced a considerable amount of uncertainty into the market:
- Iran has effectively created a floor under crude prices by cutting off oil exports to Britain and France and by continually ratcheting-up its rhetoric regarding the closure of the Strait of Hormuz through which around 30% of the world’s seaborne oil travels. The decision to cut exports is a preemptive move designed to punish France and Britain for their participation in an embargo of Iranian oil set to begin on July 1st–the embargo is an attempt by European nations to punish Iran for its rogue nuclear program. While the disruptions to the oil market are themselves disconcerting, the real concern is that Iran will conduct a preemptive strike on Israel to prevent Tel Aviv from bombing its nuclear sites.
- The civil war currently raging in Syria. While its direct implications for stocks are few, it could certainly introduce more uncertainty into markets if the situation worsens, necessitating intervention by NATO or U.S. forces to put an end to the violence.
2. The economic component:
- Consumer spending accounts for around 70% of U.S. economic activity and, after gaining some momentum midway through 2011, spending ground to a standstill during the last three months of the year even as consumer credit expanded. Accounting for inflation, spending actually fell .1% in December.
- Rising oil prices pose a real threat to spending going forward as consumers are less likely to spend when they perceive that gas prices will continue to rise for the foreseeable future.
3. The European debt crisis:
- Nothing is fixed. The second bailout awarded to Greece is little more than a quick fix to avoid a catastrophic March 20 default.
- Greece will default sooner or later and delaying the inevitable is likely to make the event that much more painful when it actually occurs.
- The ECB has no current plans to implement a third round of LTROs after next week’s second offering. Although difficult to prove conclusively, it is widely believed that the ECB’s three year, low interest loans to eurozone banks are largely responsible for preventing a disastrous spike in Italy and Spain’s borrowing costs which, had it occurred, could have caused the two countries to go the way of Greece.
- Borrowing costs could start to rise once again in the absence of further stimulus, an event which could plunge the eurozone right back into crisis mode.
4. The technical component: On a technical basis, the market looks oversold.
- The Williams R% indicator reads -11.42 for the Dow, -9.64 for the S&P 500, and -8.32 for the Nasdaq. Readings from -20 to 0 signal overbought conditions.
- The slow stochastic oscillator registers 87.21 for the Dow, 86.05 for the S&P, and 84.67 for the Nasdaq–readings above 80 generally mean the market is overbought…
- Five of ten S&P sectors are up by 10% or more already this year. Specifically, materials, industrials, consumer discretionary, financials, and information technology are up 12%, 10%, 10%, 13%, and 15% respectively. Only two of ten sectors are down this year and one of those is off by only .66% (telecom).
Considering the economy is just now limping out of a fairly deep recession and taking into account the extremely volatile nature of the debt situation in Europe and the political situation in the Middle East, it seems this market has come a bit too far too fast in 2012. Now is the time to buy puts on the SPY.
Editor’s Note: The above article has been has edited ([ ]), abridged, and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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