Lackluster Returns in a Lackluster Economy: What the Key Indicator for
this Market Is

Mitchell takes a look at the market action and tells you what the key indicator for this market is.One of the things happening in this market is that trading action is occurring as a slow deterioration, rather than an outright correction. You can see this in the technology sector in particular. This kind of market is really hard on sentiment, because investors can’t see an endgame. In a bull market, investors can quite easily get their head around a major correction in share prices, and even expect it as part of the long-term trend. In a bear market, however, there is no defined outlook—only uncertainty about where things are headed.

We are in a bear market for stocks, even though the market’s done incredibly well since last September and the low set in March 2009. Accordingly, successful stock picking is significantly more difficult. Bear market speculating is about individual stock selection obviously and it more so involves event-driven trading (on both sides of the market) for incremental gains. Longer-term investing is much less of a priority among investors, because the time horizon for seeing a potential gain on investment is much longer.

This is a difficult market environment, even for commodity investors. The marketplace is desperate for earnings results and corporate visibility to provide some direction in which to act. Precious metal producers have reported, and continue to report, good news, but these stocks are also in retreat, as spot prices aren’t going anywhere at this time. And the price of gold is only slightly off its recent high. This is another sign that we’re definitely in a bear market for stocks.

My outlook isn’t necessarily bearish for the next few years. The broader market is not expensively priced and we are going to get continued earnings growth. But my feeling is that we are in a long period of lackluster returns, reflecting a lackluster economy that needs much more time to correct itself. That’s the thing with financial market investing. You’re at the whim of a marketplace that, at the end of the day, reflects the business cycle.

With micro-cap stocks from China in the doldrums and precious metal shares trading off spot prices, from a sectoral perspective, the best area for speculative new positions in this market is in biotechnology. I do expect the gold investment theme to pay off down the road. It already has for earlier investors. And even if it does so just on the back of a weaker dollar, institutional investors are keeping some exposure to gold as a hedge against sovereign debt.

I’d feel a whole lot better about the stock market if the S&P 500 Index were above 1,300. A key indicator for the broader market remains the Dow Jones Transportation Average. This index has been trending lower and 5,000 is an important technical support level. Second-quarter numbers can’t come quickly enough.