Daily Gains Letter

Hurry up and Wait—the Mini Bull Market Has Almost Run Its Course

By for Daily Gains Letter |

DL_Feb_8_2013_MitchellThere is a lot of hope out there that the housing market will continue to improve, that there will be more employment growth, and that corporations will start investing in the economy once again. Realistically, however, it’s going to be low and slow for the near future. This is why I’m not bullish on the stock market; I wouldn’t be a new buyer right now.

I would be a buyer in the stock market after a major correction, but I don’t see any reason for investors to be buying a market that’s trading right at its high. Even though we have seen an improvement in U.S. economic news, there isn’t enough momentum in the data to jump on any bandwagon. Corporations have done a fantastic job of managing their earnings over the last few years, but behind the bottom line is the scary truth that revenues are barely growing. Corporations are sitting on mountains of cash, but they aren’t investing in new plant, equipment, or employees. To give corporations some credit, they are continuing to increase dividends and share buyback programs to keep the stock market happy. But real domestic investment won’t happen until corporations feel that they can invest in an economy with certainty, and we don’t have that yet.

Similar to third-quarter earnings season, corporations in the most recent fourth-quarter earnings season reported the same thing: North American business is getting better, while sales to Brazil, China, India, and Europe are struggling. This bodes well for domestic industrial companies, but without the rest of the global economy, U.S. gross domestic product (GDP) growth is going to be minimal.

Adding to the pressure on the economy is the austerity that is being forced on the eurozone and the U.S. government spending cuts; and we saw the effects of this, as U.S. fourth-quarter GDP numbers were terrible.

The strongest players in the economy today are corporations. For the most part, large-cap companies have healthy balance sheets with strong cash positions. Corporations are able to borrow money on the cheap, thanks to the Federal Reserve, and on the stock market, share prices are buoyant.

But while corporations are healthy, they aren’t investing. Furthermore, we’re now getting quite a bit of insider selling, and this is not a good sign for the next earnings season.

I think stock market investors should get prepared for a major correction this year. We could still get further upticks in domestic economic news, and the stock market likes to bet on the future. But the fundamentals do not support a rising stock market. Even though the valuations put on corporations are below average, they should be because revenue and earnings growth is minimal.

I think a strong degree of caution is warranted over the short-term, and I wouldn’t be buying this stock market. There’s been a lot of talk lately about investors rotating into stocks, and the fund flows support this. To me, it signals a bear market, as countless investors who have been sitting on the sidelines try to catch the current momentum.

My strategy is to wait for the next major correction, then consider new positions in well-managed corporations that pay dividends. Investment risk for new positions in this stock market is very high.

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