The financial headlines read - Stocks finish August with the worst month of losses since May 2012.
While I have maintained a cautious outlook on the market since we ran to new all time highs, it should be put in perspective that we are down a mere 4% !, from those highs. So once again , the headlines would have one believe we just had a terrible sell off. Investor reactions have had the same tone with some e-mails to me indicating how difficult the market has been lately.... I have stated many times a sell off of any magnitude (i.e 10% or so) will have investors scared to death, simply because of how 'spoiled" most have already become during the market's rally.
It is clearly evident how difficult it is to try & time the market. Simply trying to call a correction has been elusive as witnessed by my own writings.
Therefore, the challenge for investors is to distinguish between the major trends and the short-term uncertainty. The main themes are not related to headlines news, even though sentiment may drive market wildly up and then down. I like to concentrate on what is really happening around us and avoid those headlines as most of them are sheer "noise".
Lets look at what transpired last month. Preliminary data from Blackrock Inc, the largest ETF provider reveals that August is poised to see the biggest cash withdrawal from all U.S. exchange-traded funds in more than three years.
$16.1 billion flowed out of U.S. ETFs in August, through Thursday. Barring some massive moves Friday, the outflow this month would be the worst for the U.S. ETF industry since January 2010, when $17.1 billion came out.
The prime culprit is the ETF market's biggest and most widely traded fund, the $137 billion SPDR S&P 500 (NYSEARCA:SPY). The ETF had shed a whopping $13 billion alone, through Thursday. Big outflows from stock & bond ETFs overshadowed inflows from international equity ETFs, which took in $5.6 billion.
Clearly an overreaction, as investors were clearly spooked by the "Fed" rhetoric , but where is the money heading ? It certainly isn't Bond funds given the recent data on outlfows there. I believe we are still in the early innings of this trend, since bond fund investors are just now getting the bad news from their statements.
Bankrate's latest financial security index just reported that more than a quarter of Americans said they'd rather keep their savings in cold hard cash, even if they wouldn't need the money for more than 10 years down the road.. Astonishing ! This fact alone shows that we are not even close to any euphoria or major top in this market as some would suggest. No One believes !
After cash, real estate garnered 23% of the vote, followed by gold and other precious metals with 16%. That may indeed explain some recent strength in the gold market. Strength which I believe will begin to wane as we move forward. The stock market earned just 14% of votes. That suggests that this is and continues to be the most hated rally in Wall Street history. The main theme that we are in the early stages of a secular bull market is indeed intact.
Earnings remain positive as the second quarter results showed an increase of about 4%. Estimates for 2014 are now coming in indicating that we could see a gain of 10- 11% over 2013. As stated over & over it all comes down to earnings.
Surely some of the news has been 'up & down" . On the "Up" side , we received an upward revised GDP report & Michigan sentiment which came in higher than expected. However the durable goods report was undeniably weak and pending home sales took a step back falling 1.3%. It's been that way for a while , as the economy slowly rebounds from the horrible financial crisis of 2008.
Continuing to bolster the positive were good economic reports from Europe with their PMI coming in at a 26 month high. China did not disappoint either as the China HSBC PMI rose to 50.1 in August from 47.7 in July. Indicating they are now back in growth mode. In addition, output and new orders expanded; backlogs of work increased at fastest pace in two years; input costs and output charges increase for the first time in six months.
The naysayers regarding global growth will be shown that their story of impending collapse of Europe and calamity over the growth in China have the global economic rebound completely wrong. Another factor to add into the secular bull story for equities here in the U.S. as the market will react to the positive change that is taking place.
My mantra throughout has been that investors can buy stocks with an attractive valuation, good yield and a strong balance sheet. If so desired ,you can then sell near-term calls against your position and target increased returns & enhance the income stream of your holdings.
My recent 'call strategy' portfolio along with a recent addition can be viewed here.
With the headline noise that is being presented to us now this strategy also decreases some risk associated with the knee jerk overreactions we may witness in the weeks ahead.
Their will not be a short supply of news this week, starting with the employment situation as being the highlight of the week. Add in the Syria issue (Surely a circus now that Congress will be involved) , Obama visiting Russia, continuing rhetoric over upcoming debt ceiling, and add in Fed tapering issues and we have the makings for volatility taking center stage.
The naysayers will continue to make sure their story is heard during the volatility. They will continue to peddle the negativity regarding equities and we can be assured the 'Gold" mantra will also make another appearance.. If you are addicted to gold , you need a checkup, now is not the time to be adding the so called "insurance" to your holdings. Syria or no Syria .
Stay the course and remain focused on what the market is presenting. Have your list ready with entry points selected and add on these overreactions. That premise worked last Oct- Nov when many were selling over baseless fears regarding sequestration, tax hikes and round one of the debt ceiling circus. It turned out to be the launching pad for the 19% gain we have witnessed from that timeframe to present. There is no need to put fear anywhere near your thought process when evaluating the equity market.
I am maintaining the possibility that we indeed could trade down to the 1560 level on the S & P . (4% from here @ S & P 1630) However, given the positive reports announced regarding Europe & China, along with Obama rethinking his flawed decisions over Syria, we could see a sharp rebound to start the week.
It will be important to see how the other factors I mentioned will play out as the week moves along.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I have numerous Long positions as can be seen here in my blog.. I am short Gold via DZZ Stocks4income@usa.com