Monday, April 9, 2012

Start of a Significant Downturn?

Matt Nesto of Yahoo Breakout interviewed Mark Luschini, chief investment strategist at Janney Montgomery Scott, discussing whether you should be buying the dip or taking profits:

"Be careful what you wish for" the old saying goes, "because you just might get it." That now what? scenario is exactly the situation facing investors today, as the market appears set to deliver the most sought-after sell-off in years. Prior to today's trade, the S&P 500 has fallen the past three sessions and has shed 1% since the FOMC meeting minutes were released at 2pm last Tuesday.

"We've been looking for something on the order of 3-5%, but would not be surprised to see it go 5-10%," says Mark Luschini, chief investment strategist at Janney Montgomery Scott. "Frankly it would be a healthy restoration of valuations that have gotten a bit stretched given the quarter we've had in the equity markets and we'd view it opportunistically rather than as something to fear."

As much as I am glad to hear the captain of my cruise liner is remaining calm and not about to abandon ship, there are at least a few things that trouble me about this retreat so far.

First, it's been the on-demand dip and markets rarely deliver what everyone wants or expects.

Second, the downside has been way too orderly so far, and that scares me, because we all know that it takes a whole lot more than a 0.7% slide to put the fear of God into investors again. A couple of 300 or 400 or 500 point, single-day, plunges in the Dow might do the trick.

Finally, 2011 is still fresh in our minds, where April turned out to be the starting point of a six-month, 20% hammering.

Other than that, Mrs. Lincoln, the sell-off seems to be just about perfect.

"This could also take on sort of a self-fulfilling prophecy because if we do get some carry through, investors may say, 'ah-ha, this is the correction we've been waiting for' --- and to the extent that they've been nervously long, they may actually use the opportunity to sell into it, and as a consequence, exacerbate the decline," Luschini hypothesizes.

For now, his strategy is to put together a shopping list that kicks in ''once we breach 3% or so," at which point it becomes hunting season. For Luschini, that would put the Energy (XLE), Financials (XLF), and Technology (XLK) sectors in his crosshairs, as well as the Regional Banks (KRE) and Homebuilders (XHB) on a sub-industry basis.

CNBC reports that Marc Faber, publisher of the Gloom, Boom & Doom report, is warning that this is the start of a more significant downturn:

U.S. stocks are at the start of a more meaningful correction and possibly even a bear market, Marc Faber, the editor and publisher of the Gloom, Boom and Doom report told CNBC in Singapore on Saturday, though he added that further money printing would likely limit the decline in the S&P 500.

“The technical underpinnings of the market have been a disaster in the last couple of weeks,” Faber said on the sidelines of the Maybank Invest Asia conference. “The number of new highs have declined, the volume has been poor, insider sales just hit a record.”

Faber said the weakness in economically sensitive stocks such as mining and industrial goods was particularly “disturbing.”

Known as a contrarian, Faber's views are at odds with those of Byron Wien who told CNBC last week the bull market in stocks would continue throughout the year.

According to Faber, Friday's jobs report is another sign the economic recovery remains subpar and he believes the S&P 500 chart pattern is also signalling worrying signs.

The index made a head-and-shoulder pattern last year, then dropped to its October low before rebounding through the necklines to a new high, he said.

“I’m not saying that I would rely in my life only on technical analysis, but in the text books of technical analysis… (this pattern) is actually viewed as a very negative development."

Faber warned of a bear market in stocks on August 3 last year, when the S&P 500 was at 1254. While the market didn’t enter bear territory (defined as a 20 percent drop over a couple of months), Faber’s warning seemed prescient. The S&P 500 declined around 14 percent in the weeks after he spoke to an intra-day low of 1074 in October.

This time Faber is much more cautious about calling a bear market, pointing out merely that it could happen. He says he isn’t short the S&P 500 currently because he’s convinced there will be another round of quantitative easing by the Federal Reserve, which could mitigate the declines. Still, he said he was holding a bit more cash and less in terms of equities.

Gold Correction

Faber, who's been a gold bull for much of the last decade and keeps around a quarter of his assets in precious metals has been bearish on the bullion since September last year after it “overshot” and hit a record high of $1921.

On Saturday, he told CNBC, bullion prices could fall further after they declined 1.8 percent last week.

“I still feel we are in a correction period and again like in equities, it’s a correction that is somewhat more serious."

Marc Faber and all the bears are reading way too much into Friday's jobs report. As I reported, the US and Canadian March job reports were an anomaly and should be ignored. A lot of things should be ignored, including the hard landing scenario in China, and especially a total collapse in Europe. I remain long financials, tech, basic materials and energy and believe top funds are buying this dip.

Below, 60 Minutes' Steve Kroft reports on Europe's debt crisis and its ramifications on the US economy. The report was a bit sloppy (will sorely miss Mike Wallace!) but still worth watching. What remains to be seen is whether the market has discounted all the bad news.