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Pat Stout
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Since 1978 have experienced and studied many market cycles in bonds, stocks, options, etc. Tend to question herd thinking, some might call me a contrarian. A big mistake made when young (1970’s) by avoiding bonds and investing in risky stocks. It was a great lesson in risk management. Seek... More
  • The Stock Market Will Bounce Back 0 comments
    Jul 25, 2012 8:27 AM

    For the bulls the week is off to a rough start. It has been painful. With the rest of the week setting up to be a key test to determine if the bulls can regain some footing or if the bears are in charge.

    In the after-hours on July 24 2012 the SPY is at 132.94. It opened July 25, 2011 at 133.30. Therefore it has basically gone nowhere in a year.

    The S&P 500 ETF is near a key technical support. The moving averages EMA 200 is 132.37, the SMA 20 is 135.22 with the SmMA 50 at 134.34. In after-hours trading the SPY is currently at 132.94.

    On the Fundamental Side

    July 24, 2012 had a host of earnings disappointments with the S&P 500 falling 12.48 points to 1,338.04. Before the market opened Peabody Energy (NYSE:BTU) and Gentex (NASDAQ:GNTX) reported disappointing earnings and or outlook. After-hours Buffalo Wild Wings (NASDAQ:BWLD), Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX) reported disappointing numbers and or outlook. There were some positive earnings surprises as well. The question becomes does the market dwell on the negative or the positive news?

    The US bond market saw issues setting new low nominal yields for the year. It appears to be fixated on the negative news and or fears the economic outlook for the remainder of the year. Given the 2012 Congress approach of kicking-the-can and waiting until the Lame Duck session to address the issues and its history of 2008, TARP no vote resulting in stock market plunge, and in 2011, debt ceiling battle and stock market decline (see chart), the economic fear is understandable. Right or wrong, it is tough to believe Congress has not learnt its lesson. Is Congress really willing to oversee another stock market induced decline in score political points?

    2011 Decline

    Will the bulls defend the 132 level on the SPY or will the bears push the market lower?

    It would appears that the bears have the upper hand with the disappointing earnings, lack of problem solving resolve in Congress and in Europe, economic worries over European funding and the spending and tax policies of the US.

    However, should the market find the strength to hold the 132 level and break back above the 135 level then the bulls might regain some respect.

    It is tough to see anything positive, isn't it? The one bright spot is the dividend yield on many stocks exceeds the yield of US Treasuries and in some cases more than the firms bonds. At some yield level stocks may find some support.

    Right or wrong I am in the bullish camp as many stocks offer attractive dividend yields relative to bond yields. And unlike a fixed coupon bond the income stream from a stock can increase or decrease. Should investor sentiment improve then stocks may benefit from price-earnings multiple expansion even if earnings are flat. This could create a dilemma for the bears and might result in some short covering. Stocks offer low p/e and attractive dividend yields. That is why I am bullish. Time will tell if this the correction position to take.

    Disclosure: I am long BTU, GNTX.

    Additional disclosure: Long SPY calls

    Themes: market-outlook
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