The Signs You Should Look for Before Getting into Equities Again

Submitted by Profit confidential as part of our contributors program.

In spite of all the doom and gloom reactions that immediately followed the Federal Reserve’s recent decision to announce a possible scaling back of the central bank‘s bond-buying program by the year’s end, the stock market rallied for three straight days with triple-digit gains by the Dow Jones Industrial Average in each.

As I have said, the Fed will only ease off on the throttle if they think the economic recovery is on target, if the jobs market improves, and if inflation doesn’t become an issue.

The soft gross domestic product (GDP) growth of 1.8% in the first quarter was actually a relief for the stock market. Estimates had called for GDP growth of 2.4%, so it was a major underperformance.

Now I know it’s only one quarter, but the renewed buying interest that followed in the stock market suggests to me that traders are now hoping for slowing in the U.S. economy, so the easy money can continue and the stock market can keep moving higher.

I’m not convinced stocks are set for anther sizzling run-up on the charts. Trading will continue to be driven by the daily headlines, which add to the volatility.

The focus will shift to jobs in a few days and depending on what we see, the stock market will trade off that. I sense that the market is probably secretly seeking a flat number and for the unemployment rate to hold steady or rise.

Traders know that a move in the unemployment rate to 7.2% would make the Fed begin to look at tapering its bond purchases.

And don’t forget there’s also the potential negative impact from the stalling in China and continued distress in the eurozone, which will impact the demand for American goods.

The growth in the global economy is also being slashed down to 2.0% this year and 2.6% in 2014, according to Madhur Jha, the chief economist at HSBC. Jha feels the slowing in China and the possible cutting of the Fed’s bond-buying program will affect growth. (Source: Barnato, K., “HSBC Cuts Global Growth Forecasts, Sees Major Slowdown in Emerging Markets,” CNBC, June 28, 2013.)

While I feel the best gains in the stock market are behind us, I still believe there will be opportunities to make money on market weakness—the bigger the drop, the better the opportunity.

If the global and U.S. economies continue to show lackluster results, we could be seeing a few more years of stimulus from the global central banks and further opportunities in the stock market.

Chart courtesy of www.StockCharts.com

Over the next few weeks, the key will be to see how the stock market behaves and whether the bargain hunters start to surface.

I would rather just take a seat and wait for more selling before jumping in. There will be opportunities to make money on the market swings to be sure.

Source – Profit Confidential