I think investors really want to be buyers of stock at this time, but there isn’t much of a catalyst to do so. Institutional investors are buying, but they’re also playing on the market’s volatility, accentuating the results. Reality is beginning to set in now and there’s a realization that corporate earnings are actually going to be strong in the bottom half of the year. The employment situation isn’t great and neither is the real estate market, but the corporate economy is well-positioned to deliver solid earnings growth and this makes the current stock market look very reasonably priced.
Big, long-term investors relish the opportunity to buy stocks when the indices convulse on the news of the day. Whether it’s adding to existing positions or taking on new opportunities, institutional investors (and insiders) are buying blue-chip stocks in this market.
There’s been a lot of bad news lately that’s taken a toll on investor sentiment, but I view the reduced expectations for the economy as now being built in to current share prices. The big, remaining investment risk has to do with the sovereign debt issue inEuropeand the potential for a cascading run on banks in European countries. Because of this very real and serious investment risk, there continues to be an attitude of wariness about the domestic equity market.
Along with the S&P 500 Index, a lot of large-cap stocks that were the market’s leaders have crossed their moving averages on the downside. Technically, the argument for a rising stock market holds very little water. The only good news is that the stock market isn’t overvalued. Because of strong earnings and a reasonable valuation, the market is actually holding up quite well.
What everyone wants to know is what the future holds for the economy and stocks and it’s fair to say that the question is unanswerable. In my mind, the case for the bulls and the bears is about even. We could go into recession again. The stock market could go down some more. Or, the interest rates that are artificially low might finally produce the catalyst for the economy to accelerate in the fourth quarter, and so might the stock market. This is why a lot of individual investors are sitting on the sidelines; there isn’t much in the way of definitive economic analysis to take any bold, new action in this market.
What I know is that investment risk for equities remains very high at this time. Large-cap, higher-dividend-paying stocks should outperform small-cap stocks and micro-cap stocks. Gold shares remain the most attractive for equity speculators.
In a market without any defined trend, the news of the day makes the trading action. Expect more choppy trading action in the weeks to come. Pronounced stock market volatility is here to stay for a while.