Given my position at Zacks, I talk to customers all the time. And these individual investors often display eerily similar responses in the face of a market correction as we have now. Here is a typical conversation with an individual investor:
Investor: "I just went to all cash."
Me: "When will you get back into stocks?"
Investor: "When it hits bottom."
Me: "How will you know that bottoms been hit?"
Investor: "Er…. Um." (followed by the sound of crickets).
That is exactly the problem. They don't ring a bell at the bottom. And far too often the market will race higher before you feel comfortable enough getting back on board.
The goal of this article is to help you access the current market environment. Why it is likely another false scare like last year. And when to jump back into stocks just as the bull market resumes. Let's go!
The Only Thing We Have to Fear is the Investment Media
How does the mainstream investment media make money?
From advertising revenue. The more eyeballs on their newspapers, magazines, websites, TV stations etc. = more ad dollars.
And the time-tested way to getting more eyeballs is to scare the stuffing out of everybody. If they make you afraid of a looming problem then you will likely tune in.
That is how they sucked us into the last European debt scare that crushed the S&P down to 1099. Next thing you know the market is on tear to new highs at 1420.
The same kind of calamity occurred the previous summer with media induced fears of a double dip recession. That episode was also followed by a tenacious bull rally.
Could Europe implode? And Could it Send the US into a Recession?
Sure it could. But most likely not. And that is because I have great faith that European leaders will act in their own self-interest just like any other politician or bureaucrat.
Their Self Interest = Get Re-elected = Stay in Power
Any one of these leaders who stands by while Europe burns will be removed from office. So they will do everything in their power to keep the party going in Europe. That likely means papering over the problem with more debt (read: Eurobonds or some facsimile).
To me it's not really a matter of if it will happen. Just when. And I admit that during the period of doubt stocks will be under pressure. That takes us to the next point…
2 Signs of a Market Bottom
First, let me say that the little bounce taking place now is most likely a suckers rally. When Mr. Market tricks enough people to come on board, then the rug will be pulled out leading to a retest of recent lows…maybe lower. So here are the two signs that point the way to a lasting and more profitable bottom for you to invest in.
#1 - Shock and Awe: The biggest problem is that politicians often don't do the right thing until the last minute. So during the squabbling phase of their negotiations, the odds of success will look bleak. Most certainly stocks will be on the decline during this stage (which we are in now).
Then as time is about to run out they will start compromising. This will be followed by a steady stream of large and ambitious programs that aim to bring calm to the market. This "shock and awe" blitz may not do the trick on day one, but it will add up resulting in the desired positive effect.
This is the first sign to look for followed by…
#2 - Key Bond Rates on the Decline:
Here is my commentary from the 5/31/12 issue of Profit from the Pros that should put things into perspective:
"Right now only 1 thing matters. And that 1 thing is European bond rates. The same was true last summer and fall when the first iteration of the European debt scare took control of investors' psyches.
Then as now, the direction of the market can be quickly determined by the movement of the 10 year bond rates in Italy and Spain.
Rates go higher = fear on the rise = stocks head lower.
Rates go lower = fear on the decline = stocks head higher"
Unfortunately the rates have been steadily on the rise since early March and now stand at eerily high 6.3% for the Spanish 10 and 5.7% for the Italian 10 year. These are yellow flags bordering on becoming red flags if they start approaching 7%.
No matter what the headlines say, if these rates are going up it means stocks are a bad place to be. Once you see a real trend forming of ratings coming down from the brink, then you know that the bottom is ready to be put in and you can more confidently get back into stocks. I think a clear break under 6% for the Spanish 10 year is as good of a sign as we will get. So keep your eyes peeled on that.