Buy on Rumor, Sell on News—Don’t Be Fazed by a Market Selloff

Buy on Rumor, Sell on News—Don’t Be Fazed by a Market Selloff.Most of the news out there is getting better, but the stock market’s been taking a bit of a rest and that’s good. We’ve also seen a real pullback in commodity prices and this is well deserved. I don’t like it when markets go up indefinitely without corrections. It’s not healthy and bubbles almost always end badly.

So, right now, I’m hoping for a further correction in equity and commodity prices. That’s right—I want prices to retreat. I’m not bearish, only realistic about the nature of capital markets.

Stock prices have been holding up really well all things considered. Stocks have been extremely strong in anticipation of a more robust economy and a solid outlook for earnings. I don’t, therefore, think it unreasonable that the market will experience a pronounced selloff after fourth-quarter earnings season. After all, share prices have a tendency to behave like they usually do. They go up in anticipation of good news.

It’s really important, in my view, to pay attention to what large corporations say about their businesses this earnings season. They are the ones holding all the cards. They know the domestic and international economies best and they have the cost structures and pricing power to accelerate earnings. It doesn’t take too long to review what big, brand-name companies say during earnings season. This is the single most important information that is useful in honing your own market view.

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It’s important to listen to what companies like Oracle, IBM, Caterpillar, DuPont and United Technologies have to say going forward. The stock market is looking for improved business conditions in financials, transports and technology. In the past several quarters, we’ve seen some very robust earnings from these kinds of international companies, largely due to their operations in Asia. What’s required now are optimistic words about domestic operations and this will provide the confirmation that stock market investors want in order to keep on buying.

Again, don’t be surprised if really good news is met with selling in the stock market. This is what the equity market does best—buys on rumor, sells on news. But, the underlying story that big companies report is the most important news and it’s the kind of data that will sway investor sentiment over the coming months.

There’s a good opportunity here to be long the broader market, at least over the near term. I fully expect a major correction in share prices this year, but I’m not sure when. I remain hopeful that commodity prices will continue to correct, because they deserve it. If this happens, a great new entry point will present itself.