With Stocks in a Correction, 2 Top Investors Make the Bullish Case
The stock market has entered correction territory, trading near an eight-month low after falling nearly 12 percent in the second quarter. With economic indicators eroding and talk spreading of a double-dip recession, two portfolio managers and investment newsletter editors with strong track records are pointing out positive signs that others are overlooking.
James Stack, editor of InvesTech Market Analyst, said this week on his telephone update that the various technical indicators he follows have deteriorated somewhat but have not suffered the sort of breakdown that heralds a bear market.
"From a technical standpoint, there's no evidence of bearish warning flags from either breadth or leadership, which remain surprisingly firm," Stack said. He also highlighted his so-called pressure factor, a very short-term forecasting tool that reached one of its most oversold figures ever on Tuesday, signaling an imminent rally for stocks.
The 3 percent plunge in the market Tuesday helped produce that oversold reading. A grim consumer confidence report that morning helped produce the plunge, but Stack downplayed its significance in his call:
"The Conference Board reported a sharp drop in consumer confidence today, which caught Wall Street completely off guard. However, today's figures are in sharp contrast to last Friday when the University of Michigan reported its consumer sentiment gauge at the highest level in two years. Although the 9.8-point drop in the Conference Board number was unexpected, keep in mind that consumer confidence fell over 10 points in February just before the last rally. So we'd caution against reading too much into today's report or market reaction."
John Buckingham, chief investment officer of Al Frank Asset Management and editor of the Prudent Speculator newsletter, contends that the fixation on a new wave of economic difficulties is insulating the stock market somewhat from further declines because the element of surprise has largely been removed:
"While we wouldn't yet say that folks have become accustomed to the ugly jobs picture or that they have completely discounted [a] lackluster near-term economic outlook, we might argue that investors have once again priced in a significant amount of bad news, as stocks have now fallen back into 'correction' territory since the recent April highs."
Buckingham also sees the financial regulation bill percolating in Washington as a positive development because it probably won't be as bad as many on Wall Street fear. Stocks of the strongest financial companies, notably J.P. Morgan Chase (JPM) and Goldman Sachs (GS), should perform well, in his view. Other bank stocks that he likes include BB&T (BBT), Bank of New York Mellon (BK), Hudson City Bancorp (HCBK), TCF Financial (TCB) and New York Community Bancorp (NYB).
"We remain confident that those institutions that came through the carnage of 2008 with their heads well above water will ultimately thrive, despite the stricter regulatory environment," Buckingham writes. "No guarantees about the future, of course, but this was what we saw after the savings and loan crisis of the late 1980s, as investors were generally well rewarded in the fullness of time for sticking with the quality players amidst all the uncertainty."
