The stock market is heading for its third up day after the worst start of the year ever. Is it safe to buy stocks again or is there more bad news to come? Market Watch thinks that it is way too premature to start investing in expectation of a major rally. They say that when you should jump back into stocks is after the market has fallen more substantially.
Albert Edwards, SocGen’s perma-growler, thinks the S&P 500 index SPX, -0.15% could drop below the March 2009 bear-market low of 666. He says we’re likely to drop to around 550, a 75% slide from current levels. But the bottom line is that he and his colleague Andrew Lapthorne, head of quantitative equity research, believe that thoughts of bargain-hunting in this stock market are way premature.
That 75% stock-drop call fits nicely in what’s been a week of dramatic forecasts, such as RBS’s “sell (almost) everything” advice that surfaced Tuesday. No one seemed to be heeding the doomsters then, as Wall Street rode a roller coaster to solid gains. And a third-straight winning session could be on the cards today.
But, the missing piece in the puzzle is a commodities rally. “Until this ferocious speculative attack abates and the leveraged funds start covering short positions, then one of the key pieces of the bullish puzzle is missing,” he said. And that’s as analysts play the “how low can you go” forecasting game for oil.
Is it safe to buy stocks again? These folks don’t think so. Oil, China and unrest in the Middle East are all issues that need to come to some sort of resolution in order for the economic picture to get better and provide the basis for a stock market rally.
Is There More Trouble in China?
The problem with China’s economy is that no one knows for sure just how bad things are according to CNBC.
China poses the next big question, Rogoff said, citing government opacity and mounting debt. “We don’t know what’s going on [so] it’s hard to know how quickly this could reverse.”
Signs from commodities like oil trading around 12-year lows could be a reliable test for the health of the world’s second-largest economy, Rogoff said. “In some sense the low commodity prices are as much of a measure of what’s going on as any of the official numbers.”
China has lots of foreign currency reserves but they are burning through them rather rapidly in an attempt to stabilize their stocks markets and make up for massive cash flows out of the country. Obviously it is not yet a good time to invest in China but is it safe to buy stocks again elsewhere? To the extent that a hard landing of the world’s second largest economy would disrupt markets, it is probably best to wait.
American Oil Producers Call the Saudi’s Bluff
The advent of technology for fracking oil shale formations has driven US oil production up and imports of oil down. The response of Saudi Arabia and other Persian Gulf producers has been to increase their production in an attempt to drive new high cost US producers out of business. This strategy has only been partially successful and fracking operators become more efficient and continue high US production. US operators have essentially called the Saudi’s bluff and eventually Middle East producers will back off a notch to let prices rise. As bad as oil stocks look today this may be exactly the time to invest at historically low prices, providing that you are willing to wait until prices recover.