Ignore the Noise, Stocks have Likely Bottomed
By David N. Frazier
May 24, 2012
Stocks around the globe bounced around over the past few days in response to short-term traders bidding up the prices of oversold stocks on Monday and Tuesday and then reducing their equity holdings on Wednesday over concerns that Greece might soon default on its debt.
Although the concerns about Greece are understandable, recent economic statistics and the readings on numerous technical indicators suggest that stock prices, in general, will trend higher during the weeks ahead.
For example, economic statistics for countries other than those that compose the Eurozone indicate that most economies around the world will continue to expand throughout the remainder of this year, albeit at a slow pace. Any such expansions would likely be accompanied by increases in the aggregate revenues and earnings of companies around the globe. That would be a very significant development, if it were to occur, because stock prices are ultimately determined by the direction of corporate profits.
Meanwhile, the recent trading action in the financial markets indicates that stocks have likely bottomed. For example, stock market indices in most regions of the world bounced off some key price-support levels this past Monday, and remained above those levels on Tuesday and Wednesday, after price-momentum statistics for those indices fell last week to substantial oversold levels.
In addition, my Stock High-Relative-Price-Strength Index and the cumulative advance-decline line for stocks that trade on the New York Stock Exchange also held above some significant price-support levels over the past few days.
Separately, recent statistics from the American Association of Individual Investors ("AAII") and Investor's Business Daily ("IBD") indicate that most investors who were considering getting out of stocks have likely already done so.
Specifically, statistics issued by the AAII reveal that individual investors were bearish for the sixth consecutive week during the week ended May 18, while recent readings on IBD's accumulation-distribution rating indicate that institutional investors made substantial reductions to their stock holdings during the past few weeks.
If most investors have in fact reduced their stock holdings to levels at which they're comfortable, the selling pressures that negatively impacted stock prices from April 2 to May 18 have likely dissipated. Yesterday's one-day reversals in the major U.S. stock market indices seem to support that likelihood, with those indices falling sharply on Wednesday morning but then closing either near or above the levels at which they closed on Tuesday.
With stocks of many companies now trading at what appear to be bargain prices in relation to those companies' projected earnings over the next few years, my experience suggests that now is a time to take advantage of the recent stock market pull-back by investing in stocks of companies that are strong, financially, and that have, historically, been able to grow their revenues and earnings at a fast past. Some examples of those types of companies are Silicon Motion Technology (NASDAQ:SIMO), EPAM Systems (NYSE:EPAM), Ubiquiti Networks (NASDAQ:UBNT), and SolarWinds (NYSE:SWI). Click here to review some general information on a few of those stocks.