A Correction in the Works
Last Wednesday, the market suffered a big sell-off, thanks in large part to rumblings from the Federal Reserve that the punch bowl of easy money will, at some point, be taken away from Wall Street. Then on Monday, word of what’s being called a "hung parliament" after the tumultuous Italian election rocked equities here at home, and that caused stocks to fall more than 200 Dow points.
On Tuesday, and again today, stocks have come back and regained their bullish mojo, and that’s due largely to Fed Chairman Ben Bernanke and his testimony to Congress. The central bank chief made it quite clear that the easy money spigot isn’t going to be turned off anytime soon. Hence, we’re seeing a resumption of the pell-mell buying across the board.
Still, the latest bout of selling on what I call "real news" is something that’s telling me a change in the zeitgeist of the market is taking shape. In fact, I see the last two big down days as the beginning of a correction in the works. Given the extreme run higher in stocks so far this year, a correction could be very painful for those with excessive equity exposure.
So, what "real news" events are going to keep putting pressure on this market going forward?
First off, the hike in the payroll tax of 2% already has put pressure on discount retailers such as bellwether Wal-Mart (WMT), and I suspect the real pain of this tax will be felt once discount retailers begin coming in with first quarter earnings in April. Then we have higher gasoline prices, which keep going up, up, up. In fact, according to AAA, last week the national average for a gallon of regular unleaded gasoline was $3.78, which is one of the highest on record for February. Moreover, up until last week, we saw gasoline prices rise for 36 consecutive days, the longest such string of increases in nearly two years.
The latest point of real-news worry for investors is the so-called sequestration, which will trigger automatic federal spending cuts this Friday if the president and Congress can’t come to an agreement on a deficit reduction package. According to the nonpartisan Congressional Budget Office, the automatic spending cuts set to begin March 1 will slow economic growth by 0.6% and cut 750,000 jobs.
All of these headwinds, along with the grossly overbought equity market, make me extremely cautious about this market going forward. As such, I think now is not the time to tempt fate and buy in.
Finally, what passes for real news out there in the financial media these days really just amounts to an endless parade of bullish talking heads promoting the "buy, buy, buy" Wall Street party line. Rarely do I see anyone talking about how to accomplish the goal of getting safe, rational returns.
I’ve always been of the opinion that protecting assets and getting rational returns on your money is the best way to invest. In fact, one of the goals of the Alert, and of my Successful Investing advisory service, is to help you do just that.
So, don’t believe the hype or the bullish heads out there. Study the real news, and act accordingly.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
