It's been a brutal few weeks. Stocks at home and abroad have been pummeled by the combination of fresh recession fears and financial panic. Instead of focusing on solid second-quarter earnings or a slowly improving jobs picture, all eyes were on sovereign debt concerns and the rising potential of two disaster scenarios: a default by the U.S. Treasury and a breakup of the eurozone.
As a result, a number of major stock averages have fallen more than the 20% technical guideline used to define new bear phases. The Russell 2000 Small Cap Index is down more than 22% from its high. The iShares Transportation (IYT) is down nearly 21%. Markets in Brazil, France, Germany, China and India have also crossed the 20% threshold.
Yet mindless terror is now giving way to a more reasoned analysis as stocks whipsaw near their lows. The surge of buying in U.S. Treasury bonds proves America still issues the reserve asset of choice and retains its haven status. And a big drop in Spanish and Italian bond yields shows that European policymakers are serious about ring-fencing their problems.
This is the bottoming process I've been waiting for. And it's a sign that the time to start buying up stocks at deeply discounted prices is nearly here. Here's why.
There are three big reasons I don't think this particularly nasty correction will mutate into a full-on, raging bear market.
First, the economic outlook, while difficult, isn't likely to involve a new recession. Profits remain strong. Jobs are being created -- slowly, but still. Interest rates are hovering near historic lows and are set to remain low for two more years. And as I mentioned in my column this week, there remains a big, untapped driver of growth waiting to be unleashed: the corporate investment cycle.
Second, we're about to get the benefit of a number of "automatic stabilizers" that should help the economy recover from its most recent growth scare.
The first is a big drop in interest rates as bond traders price in the economic equivalent of the Black Death. As a result, yields on 10-year Treasury notes have fallen to levels not seen since the depths of the 2008 financial crisis. The second is a big drop in food and fuel prices. The chart below shows how one measure of energy prices has fallen back to recessionary levels seen in early 2009.
After months of worrying about higher inflation working through the supply chain, we can now wait for deflation to work through. And that's great news for frazzled consumers.
And here's the biggie: If the deflation trend takes root, it will give Fed policymakers justification to build on their decision to keep rates low through 2013 with new policy initiatives -- like another round of stimulus or an extension of the average maturity of the Fed's Treasury holdings. They're already talking about doing more. Indeed, the Fed's statement after its policy meeting this week noted that the "the range of policy tools available to promote a stronger economic recovery" were discussed and that the central bank is "prepared to employ these tools as appropriate."
Third, the long-term technical indicators have yet to definitively roll over as they did in 2007. Yes, the cumulative advance-decline-volume line has formed a "negative divergence" to worry about, but the cumulative advance-decline-issues line, a similar but more closely followed indicator, has made no such warning. I'll call the long-term outlook "undecided with a negative bias" for now.
But there are other signs that the smart money is using the dip as a buying opportunity. Corporate insiders have been eager buyers, ramping up their purchases of stocks to multi-year highs this week. Moreover, they're focusing on smaller, riskier stocks that are more sensitive to the vagaries of the business cycle. That's a huge vote of confidence and not something you'd do if you thought business was terrible and about to get worse.
Other smart-money measures, such as the positioning of commercial trades in the equity futures market and the relationship between stocks and bonds, are telling the same story: It's time to buy.
To get started, I'm adding the ProShares Ultra QQQ (QLD) and the ProShares UltraShort Treasury Bond (TBT) to my Edge Letter sample portfolio, which tracks my recommendations for MSN Money readers in real time. I've also recommended the two ETF to my newsletter subscribers.
In addition, I want to add one individual stock pick to the list: Mistras Group (MG), a provider of asset protection solutions to companies in oil and gas, nuclear power, public infrastructure, aerospace and pharmaceuticals. I found Mistras with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Editor's note: Fidelity sponsors the Investor Pro section on MSN Money.)
I'll have more recommendations soon as a new uptrend continues to develop. Stay tuned.
Disclosure: Anthony has recommended MG, TBT, and QLD to his newsletter subscribers.
Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Besides a shamless plugging of his newsletter lol, do you know why Tony "market slimer" writes so much? Because if he had any clue, he wouldn't need whatever MSN is paying him for this garbage.
"The second is a big drop in food and fuel prices."Bought milk yesterday: $3.89 for a gallon of 2%.Bought gas yesterday: $3.75 for a gallon of 87 octane.
If that's a "big drop" in prices, then I'd hate to see an increase. I won't be able to eat or get to work for much longer. I have a feeling that Tony doesn't do much shopping. Or he just doesn't need to worry about the price. A little accuracy in his commentary would be nice. And we'll see if the bottom in the market has really happened. My money will stay in my pocket for now...as it has for the last three years. Unless, of course, I decide to buy more commodities. If there is one thing I'm certain of, it's that the government will continue to devalue the dollar and spend money that they don't have. Guaranteed.
When one of these market analysts shows me that he or she can call the next three 400+ point daily moves in the DOW in advance (up or down) I will start acting on what they say.
What say you about that Anthony.
Read Full Article »