By Clyde Noel
Last week was the first week in months all indexes closed lower, with investors taking some profits and driving down prices. Investors are concerned that stock prices are getting out of hand and are looking for a market correction to reasonable levels.
After more than three months of stock rallies, with the Dow Jones industrials gaining 24 percent since October, there is growing concern the market is ahead of itself. Analysts say investors are searching for more solid evidence the economic recovery is on track.
Technology stocks have had a big run-up and are particularly vulnerable. The Nasdaq composite is up 21.72 percent since Jan. 1, and the Town Crier index has risen 32.16 percent since Jan. 1. Of the 50 stocks on the Town Crier index, 42 are showing a double-digit increase.
Last Friday was an indicator of bad news to come. Selling on the Dow was broad, and 26 of the Dow 30 closed lower, causing the Dow Jones industrials to fall below the 9,000 level.
Stocks could be vulnerable to similar action this week, since the week is shortened by the Fourth of July holiday and the corporate earnings reports are starting to come in. Investors will likely see many large-cap companies issue profit warnings that could cause the market to slide.
Federal policy-makers are doing everything they can to revive the ailing economy. Consider the recently signed tax cut plan, the Fed’s 13th rate cut since January 2001, taking the Fed funds rate to 45-year lows; a weakened dollar to help increase exports; and lower mortgage rates — all of which have failed to boost the economy.
The biggest problem is that businesses have yet to start expanding operations or hiring new workers. Those are two activities critical to economic strength for the future. The unemployment rate is at a nine-year high of 6.1 percent and likely to go higher.
This is creating a dilemma for investors. Where can they put their money without getting burned? Most analysts say the best thing to do right now is systematically pare back exposure to bonds. Let the cash accumulate on the sidelines, and begin to periodically invest in the stock market the next six months to a year.
Stocks will likely trade sideways for the next week or two. Trading activity will likely be dull because of the holiday-shortened week. The New York Stock Exchange will close early at 1 p.m. Eastern Daylight Time Thursday and remain closed Friday. Keep in mind low volume leads to volatile swings in the market.
Overall, the market seems to indicate investors shouldn’t brace themselves for a crushing disappointment, but neither should they count on a moonshot. If you’re looking for a rip-roaring bull market you’ll be disappointed. If you’re looking to make money, beat inflation and have a portfolio that looks for growth as well as total return five years from now, nibble away.
