In 2011 there were three catalysts that really pushed the markets lower: the eurozone crisis; U.S. debt crisis which resulted in the first downgrade in our history; and slowing growth in China. These three events have been headline news on a daily basis and each play a role in determining the future trend of the market. It's been 6 months since the market selloff began and the markets have been volatile ever since. Not much has changed in the global economy since the crash in late July: Europe's still a mess and has made little progress, U.S. politicians can't agree on any budget cuts and questions still surround China's growth which is heavily reliant on the future of Europe. Yet despite the fact that each of the market moving factors are still present there is a new found optimism among investors with the Dow Jones trading at its highest level since the selloff began in late July.
With the market gaining momentum several of the most beaten down stocks are trading higher. I wonder if now is the best time to purchase these volatile stocks, if short-term gains are the goal. However, the issues that move the market are still present and most investors believe the issues will remain a large concern throughout 2012. In fact several European leaders have already announced that 2012 will be similar if not worse than 2011. With a presidential election right around the corner I don't foresee any substantial changes to our country's debt. I believe that short-term investors could be falling into a trap and that the recent gains will be short-lived before the market falls back into its normal trading range, which is lower.
Over the last 6 months I have been particularly bullish regarding the future of our economy. And although I am warning against short-term gains I remain bullish that the market is presenting unprecedented value for value investors looking to purchase stocks for long-term gains. Because rest assure that with so many potential problems in the global economy the market will fall and beat down stocks aren't going to make full recoveries until these issues are resolved. Therefore, the best way to play this market is to wait until the market falls before buying undervalued stocks and then ignore the volatility within the market or buy and sell the pops.
To better validate my beliefs, that now is a bad time for short-term investors, I have included a couple of charts which will show the price performance of the most beat down stocks over the last 6 months. These stocks are some of the most highly debated stocks within the market because each have traded significantly lower despite fundamental improvements. Therefore, if your goals are short-term gains and you are considering a potential purchase in one of these stocks then I am going to show you why it would be better to wait a little bit longer.
The two charts below show three dates on each chart with the Dow Jones' closing price on each day being within 200 points of the corresponding dates on the same chart. The first chart is three separate dates, over the last six months, when the Dow Jones was trading between 12,200 and 12,400. The second chart shows three additional dates, with the Dow trading between 11,613 and 11,808 during these dates. The purpose of the charts is to show the price action of the seven stocks at a similar price but on different dates; which I believe speaks volume on how investors are trading these stocks. I have used charts similar to the ones below during the last few months to find value in stocks and I believe it's the best way to predict which direction a stock may trend in this volatile market.
|Company||MGM Resorts||Alcoa||Chesapeake Energy||SandRidge Energy||Bank of America||Citigroup||Freeport-McMoRan||Dow Jones|
The above chart shows seven high profile companies whose stock has traded significantly lower over the last six months. The last date on the chart is January 3, which is the first trading day of 2012, when the market posted large gains. However, each of these stocks are trading lower than on July 27 when the Dow was trading 100 points lower. And what I find to be interesting is that these stocks aren't trading lower by 3 or 4% most are trading at least 20% lower which shows the mindset of investors regarding these stocks; which is quick to sell and slow to buy.
The second chart shows the price of the same stocks on three days when the market was trading between 11,613 and 11,766, which is significantly lower than the range on the first chart. If you compare the prices of these stocks during each of the three days you would see that prices decline with each passing date. And on December 19 the Dow was over 150 points higher than on August 31 yet each of the stocks was trading much lower on December 19. This chart shows the same trend as the first chart which is a unwillingness among investors to purchase these stocks during rallies but a willingness to sell the stocks when the market falls by the slightest margin.
There is a large number of stocks that are trading similar to the seven stocks that are charted above. However, I believe that each of these stocks would make great investments for the long-term investor. Yet if your goals are to return short-term gains then your chances are slim to none, with the market trading at its high range. Over the last 6 months the markets have been very volatile, and for short-term traders, one wrong move can result in large loss. Therefore, I suggest staying away from these stocks, unless you are investing for long-term gains, because there are too many stocks in the market that are trading higher despite the market's trend and each of these stocks are trading off fear and emotion rather than logic.
The two charts show how reluctant investors are to purchase these stocks when the market rallies. Therefore, in my opinion, each of these stocks will fall in the near future below its December 19 price. The goal of investing is to buy low and sell high and most likely you could buy one of these stocks now and return very large gains over the next few years. But if you have patience, then it appears a better price could come at some point in the near future. Almost all of these stocks are now trading at a lower price than they were on August 31, when the Dow was 800 points lower, which signals to me that investors are not willing to buy this rally and that each of these stocks are probably near its limit and will soon reverse to trend lower.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.