At this point, what the stock market needs is a little time for reflection. And by that I mean that the market participants really need to sit back, pause, and examine the situation.
As you already know, I was disappointed that the correction in June was not deeper—I was waiting for a bigger discount before going shopping for stocks. Even so, the stock market has since rallied to recover to above its record highs, as is the case in the S&P 500 and Dow Jones Industrial Average. There was money to be made, just not as much as I had hoped.
Now we are seeing some hesitation. That’s completely normal because of the general upward drive of the stock market. But I have been surprised to see stocks move up so rapidly, and I continue to question whether the upward moves are sustainable. Of course, the fact that the Federal Reserve will continue to print tons of money certainly isn’t hurting the market.
But my sense is that for the stock market to ratchet higher on the charts, we will need to see corporate America deliver some surprises, especially on the revenue side. We all know Wall Street cut its earnings estimates, so meeting them really is not a big deal.
But if companies can deliver stronger results, it may be enough to drive the stock market higher. However, if that doesn’t happen now, then perhaps the market will strengthen in the third and fourth quarters when growth is expected to pick up—the health of the stock market is dependent on growth.
Of course, as we have seen in the recent quarters, the forecasts have been steadily lowered by analysts as time passed. For example, earnings growth in the second quarter is now estimated to be 0.7%. Previously, it was estimated to be 4.3%. It’s all about expectations.
The reality is that the stock market continues to underestimate the slowing in the eurozone and the global economy. And that underestimating affects demand for U.S. goods and services.
Some investors were giddy last Monday when China reported its second-quarter gross domestic product (GDP) growth at 7.5%. The relief felt on Wall Street was because there had been fears the reading could fall below seven percent; but what those relieved investors had forgotten is that the reading was also the lowest in 23 years, so the news wasn’t exactly good—but it wasn’t as bad as it could have been either. And the stalling—even at 7.5%—is worrisome because it could result in reduced demand for “Made in USA” goods.
My advice to investors is to ride the current trend and keep making money. At the same time, I would also take some profits off the table, especially after strong surges.
And for your positions in negative territory, rallies are also an opportunity to dump losers—what I call trading mistakes—because, at the end of the day, I still see a downside move in the stock market and a subsequent buying opportunity.
~ by George Leong, B.Comm.
This article George’s Mid-Month Forecast on the Current Stock Market was originally published at Investment Contrarians