Market Diagnosis: Opportunities Ahead, But Not Yet

Mar. 06, 2012 5:16 PM ET2 Comments
John Tobey, CFA profile picture
John Tobey, CFA
1.25K Followers

Photo of stethoscope with calculatorAfter a smooth rise from last year's lows, stocks stalled out over the past few weeks. Which way would they go? Many pundits predicted higher prices ahead, using the rationale of "still cheap." However, this is one of those times when valuation measures don't mean much. Here's why, how we should view this drop and, most importantly, how to take advantage of it.

Why the drop? The stock market entered the earnings dead zone too "toppy" just as economic reports started showing slower growth.

The period between earnings reports, like now, is a kind of no-man's-land where economic reports and other news take over. The current period will last until April 10, when Alcoa (AA) leads off the first quarter 2012 reporting cycle.

These dead zone times allow analysts to fine-tune their expectations based on the latest information, and they allow investors to reevaluate their positions. Therefore, any excess reactions during the earnings period can be adjusted.

The recent earnings reports were good, but not dazzling. Therefore, the stock market's continued uptrend and subsequent pause seemed to fully value that most recent information, putting buyers and sellers into a stalemate. Such positions (at the end of uptrends and downtrends) often result in a reversal.

Moreover, we are seeing many economic reports coming in with continuing improvement, but at a slower rate. This more moderate growth was underlined in Ben Bernanke's recent comments. Because stock prices are built upon expectations, a slower growth rate necessarily weakens stocks' support.

Caterpillar's (CAT) recent decline reflects those factors and mirrors the moves of many stocks:

CAT stock chart

(Stock chart courtesy of StockCharts.com)

How should we view the drop? As an adjustment and a shift change, not as the beginning of a bear market.

To me, the best saying about today's situation is, "When stocks cannot go up, they go

This article was written by

John Tobey, CFA profile picture
1.25K Followers
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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