Investors were jumping into stock buying on Thursday morning. But while it may be an encouraging sign for the stock market, my advice is not to be fooled by this dead cat bounce.
We will likely see oversold buying after bouts of deep selling (as we have been witnessing). I doubt there are sustainable market gains around the corner; unless the global situation changes and corporate America begins to finally offer evidence of concrete growth.
I’m not going to provide stocks or sectors to buy now. I believe there will be more downside moves to come that will give you more opportunities to jump in on the long end.
A sector that is looking better is the embattled gold market, which continues to languish below $1,200 an ounce. However, the yellow metal could stage a decent bounce should Greece exit the eurozone and the situation in the Chinese stock market worsen.
The point is that the current state of the stock market is all about assumptions and different outcomes.
Things in the stock market can quickly change. The stock market is pressured by three major variables at this time.
Stock Market Variable #1: Greece
At the top of many lists is the Greek drama.
Greece could see its new austerity plan accepted by its lenders. Accordingly, the money flow into this debt-laden country could begin. Of course, with Greece straddled with $270 billion in debt, I would bet the country runs into trouble again years down the road.
The problem is, with so much focus currently on how to save Greece and keep it in the eurozone, this impacts the ability of the other countries to focus on their own affairs. The eurozone is finally beginning to show some economic renewal. So, it’s clear we don’t want to see Greece or the other weak members derail the situation. A strong eurozone and Europe are good for the global economy, including the U.S. economy.
Stock Market Variable #2: China
The second risk variable is the brewing bubble in China and the way it runs its stock market, which I recently discussed in a previous commentary. While the Shanghai Composite Index has corrected about 30%, there is still excessive froth there that could drive the Chinese stocks down much lower. A retrenchment of 50% would not be a surprise if the government’s strategies to artificially prop up the mainland shares fail to work.
Forcing brokerage houses to refrain from selling shares and having them buy shares with $19.0 billion in available capital is simply not how efficient stock markets should work. The ease of margin finance to the neophyte investors who consider the stock market as a casino was simply a bad move that helped to rocket the index up over 140% in a year. Now we are seeing the end result of this miscalculation. And it’s going to hurt when the bubble really bursts.
Stock Market Variable #3: U.S. Corporate Revenues/Earnings
The third bearish variable is the lack of growth in corporate revenues and earnings of American companies. With the second-quarter earnings and revenues estimated to contract 4.5% and the muted growth extending into the third and fourth quarters, I’m not super optimistic at this point. Of course, matters would be made worse if the Greece situation blows up.
For now, if you’re not a trader, I would be sitting on the sidelines. Hedge using put options and covered call options to generate premium income, as the worst may be around the corner.