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Stage Being Set Up for Big Buy – Late Summer, Early Fall

April 29, 2011: “Best Six Months for Investing Ends Today”May 2, 2011: Is BIG Money Selling Into Earnings Euphoria” ?Looking back a mere month, it is obvious the BIG money was ahead of the

April 29, 2011: “Best Six Months for Investing Ends Today”
May 2, 2011: Is BIG Money Selling Into Earnings Euphoria” ?

Looking back a mere month, it is obvious the BIG money was ahead of the crowd – again.

Brooksie’s Daily Stock Market blog: An edge before the open.

Friday, June 3, 2011 9:23 am EDT

DJIA: 12,248.55
S&P 500: 1312.44
Nasdaq Comp.: 2773.31
Russell 2000: 820.69

Obviously the BIG money was on board for the Sept. 2010 to May 2011 run in the market, but, as it so often does, exited in April while investors were scrambling to buy stocks in face of a host of earnings reports that “beat” projections.

Most likely, the BIG money was aware of the reports of a slowing economic recovery, as well as the strong tendency of stocks to perform well between November and May, then go into hibernation for 5 to 6 months.

Suddenly, the stock market is marching to the drumbeat of concern about the sustainability of the global economic recovery as one report after another suggests another slowdown.

Just within the past week the Street has been blindsided by disappointing reports on all phases of the economy. Including consumer confidence, employment, industrial production, home sales, and manufacturing.

Today’s Employment Situation report added to fears about the economy with only 54,000 jobs added in May vs. 251,000 in April. Estimates called for 177,000 jobs to be added.

At 10 o’clock, we get the non-manufacturing ISM report, a survey of 400 firms in 60 sectors across the United States, encompassing the agriculture, mining, construction, transportation, communications, wholesale and retail trade industries.

Add to that, European sovereign debt woes and turmoil in the Mid-East, and you have a news sensitive market that demands respect.

One negative that may not be factored into stock prices yet is Q3 earnings. Between now and the fall, how many earnings estimates will be revised downward ?

The prospect of this new negative could account for the failure of the rally that results from Congressional approval of the nation’s debt level increase in late July/early August.

Without a steady flow of stellar corporate earnings, beating guidance and Street estimates, the market has little good news to offset the negatives.

The big uncertainty, of course, is the Congressional approval of the nation’s debt level.

The deadline for an agreement is August 2. Normally, this is a routine decision, but far more complicated this time around since it is tied to a longer term solution for the nation’s rapidly rising national debt.

Naturally, this issue will increasingly dominate the news with the prospect (remote) of a U.S. default on certain obligations if an agreement is not reached.

You will recall the economy hit some rough spots a year ago, and the Fed rushed to the rescue with QE2. While there is no talk of a QE3, the Fed is expected to go slow in exiting stimulus per Fed Vice Chair Janet Yellen’s statement yesterday, “The current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.”

My perspective now:

Good news: Big buying opportunity shaping up !
Bad news: It most likely won’t happen until Late August/September.

A combo of reports of a slowing economy and speculation in the press of a possible default on certain obligations by the U.S/ government as a result of Congress not approving an increase in the debt limit by August 2 will continue to crunch stock prices.

Should it get really ugly before an approval, expect a big rally when the news is announced, i.e. “Phew ! We dodged the bullet” !

I expect that rally to fail and yield to another slide in stock prices, fueled by downward revisions by the Street of Q3 earnings estimates and more angst about the economy.

I expect a big buying opportunity in late summer/fall.

Presently, I see the possibility of a bottom between DJIA 10,700 and 10, 830 (S&P 500: 1150). It’s too early to get specific. A free fall in stock prices could create a bottom sooner that fall.

Obviously, some stocks will move counter to the trend, some that get hammered will bottom out ahead of the market in general.

BEWARE ! Sharp, abrupt rallies that look like the big turn, only to fail, followed by another slide.

Patience !

George Brooks
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