By George Leong, B.Comm
The stock market may have staged a decent rally last Thursday, but it's not enough to convince me that the worst is over. In reality, I think there are more downside moves and opportunities to buy on the stock market ahead.
The Dow, S&P 500 and NASDAQ are down by about four to five percent, so it's really not a stock market correction at all - but simply an adjustment. A correction is generally seen to be a loss of 10% or more.
Even so, investors are scrambling to exit positions. Based on research by Citi Research, there was a record $28.3-billion weekly withdrawal from U.S. equity funds for the week ended February 5. (Source: Eisen, B., "Equity funds have record week of withdrawals: Citi," MarketWatch, February 7, 2014.) Of that $28.3 billion, about $14.8 billion was funneled into bond funds. The research also indicated $6.4 billion was taken out of emerging markets funds in the stock market.
Then there's Dr. Marc Faber, also known as "Dr. Doom" on Wall Street, who feels there's more selling to come. He also singles out the technology sector as being bubble-like, especially with the overvaluation of the social media space. (Source: Lewitinn, L., "Dr. Doom: Tech stocks even more overvalued now than in 2000," Yahoo Finance, February 7, 2014.) (For my analysis on the social media space, read "Two More Internet Stocks to Watch.")
To some degree, I do agree with Dr. Doom, but I don't believe there's a bubble in the technology stock market like there was during the meltdown in 2000. My feeling is that just some areas of the technology sector are clearly way too euphoric and vulnerable to a much bigger sell-off, such as social media and Internet services, but this could open up some good buying opportunities.
The problem is that without the presence of a bottom, it's difficult to gauge when to jump in. I suggest waiting a bit longer to see if we get another downside push in the stock market. As I have said, I'm waiting for a stock market correction and buying opportunity. A move down by seven percent or more from the recent highs would make things interesting for buyers.
One positive note from last Friday was the ability of the stocks to hold in spite of the disappointing non-farm payrolls for January coming in at 113,000, well below the consensus 185,000. It was the second straight month of job softness, which is a concern for the economy, especially with the Federal Reserve now tapering its bond buying. The unemployment rate fell to 6.6%, close to the 6.5% target set by the Fed to consider raising interest rates. The central bank has said the target is only used as a gauge and may not mean a rate change. My thinking is that the Fed may decide at its March Federal Open Market Committee (FOMC) meeting to hold back on any further tapering until the jobs growth picks up.
Whatever the case, I see upcoming opportunities to buy, especially if the stock market can edge lower, as I continue to believe that stocks are heading higher over the longer-term.