VERSACE: Be alert for market pullback to invest

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ANALYSIS/OPINION:

There has been much talk during the past couple of the days about the stock market and the two-year anniversary of the strong upward move in the indexes, more commonly referred to as a “bull market.”

Indeed it has been quite a bull market over the past 24 months, with the S&P 500 up roughly 53 percent in that time, and that pales in comparison to the tech-heavy Nasdaq Composite Index which rose 119 percent over the same period.

As that anniversary passes, many are wondering how sustainable the bull market is at current levels after such pronounced moves in arguably a relatively short period of time.

On one hand it’s a fair question, but at the core it really depends on what kind of investor you are. If you’re a quick trader, meaning you like to churn your portfolio and capture a large number of modest moves, then odds are you are wondering what to do next. Keep in mind that short interest levels, an indicator of the number of investors who are looking to profit from a fall in the stock’s price, have been on the rise at both the New York Stock Exchange and the Nasdaq. And yet, according to the Investment Company Institute, investors have put $24.2 billion into U.S. stock mutual funds so far this year, which is in stark contrast to the $96.7 billion they withdrew in 2010.

For more patient long-term investors, given the market move, you have to double if not triple check the drivers behind why you purchased shares in certain companies as well as their respective current valuation. If the thesis holds and the valuation is reasonable, then odds are the patient investor does have much to worry about — especially if he or she invested in the first half of the past 24 months. I say that because some of the entry points to be had at that time were amazingly attractive on a valuation and historical price basis. It goes to show that a prepared investor is a savvy one.

In my opinion, the odds are pretty good that the market at a minimum is poised for a breather here and more likely a pullback from its two-year high. That’s not to say the market won’t move higher longer term — should signs emerge that the economy is continuing to rebound, it will move higher; but in my view a number of factors need to be digested which might affect that outlook at least on a near-term basis.

These factors include the direct and indirect impact of higher oil and gasoline prices as well as other commodities on discretionary consumer spending, particularly given little to no wage growth as we saw in last week’s February employment report. Looming budget cuts on the federal, state and local levels and what those cuts mean in terms of fresh jobless claims.

Succinctly put, little to no wage growth amid a rising input-cost environment has many wondering about the health of the consumer, particularly in terms of disposable income. With oil prices up from the mid-$80-per-barrel level this time last year and up from 12-month lows in the mid- to upper-$70 per barrel, the rise in oil prices in recent weeks has translated into a significant move at the gas pump.

According to the latest Lundberg Survey, the national average for a price of self-serve unleaded gasoline is $3.51, an increase of 32.7 cents from the last survey two weeks earlier. Taking a longer view, the survey goes on to show that gas prices have risen nearly 82 cents since September of last year.

According to data from Food and Agriculture Organization (FAO), the global food price index reached a new high for the third straight month in February. FAO’s index, which is a compilation of price data for sugar, cereals, oils, meat and dairy products, averaged 236 points in February, 2.2 percent higher than the previous high set in January and 36 points higher than the average for all of 2008. As I mentioned recently, cotton and synthetic prices are up significantly as well and are prompting a number of apparel companies to implement price increases.

Given all of that, as well as a different view on the trend in unemployment, it’s no wonder a recent poll from Gallup shows that U.S. economic confidence has fallen in recent weeks. That different perspective on the unemployment rate is also from Gallup, and it shows a very different picture than February data from the Bureau of Labor Statistics (BLS). While the BLS data showed a modest decline in the unemployment rate in February to 8.9 percent from January’s 9 percent reading, Gallup reported unemployment without seasonal adjustment rose to 10.3 percent in February, up from 9.8 percent at the end of January. Moreover, this marks a continuation of a rising trend that began several months ago.

In terms of the market, Wall Street will have to ascertain what these factors mean to consensus earnings expectations for the next few quarters. Already Wall Street consensus numbers show very modest growth on a sequential basis for the S&P 500 in the current quarter, and the real question is whether the expected sequential growth in the second half of this year holds.

Currently, the Wall Street consensus calls for S&P 500 operating earnings to improve 7.3 percent in the second half of 2010 versus the first half of the year.

Buckle up but be ready as market pullbacks tend to offer good entry points for both patient and quick money investors alike.

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About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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