Headline risk and what investors can do about it
Headline risk can send the market spinning, admits this U.S. analyst, but we’re still in a long-term bull market and it’s not time to sell up.
If we didn’t read the headlines, would the bad news go away?
Of course not. But more to the point, if we didn’t react to the headlines, would the market be a happier place?
The buildup of bad news from Europe and elsewhere triggered a nightmare for many investors (and a boon for short-sellers) over the past week or so.
There can be little doubt that “headline risk” played a role in sending the markets on a downward spiral. When bad headlines accumulate, we should be wary at the very least.
But where do we go from here? Do we buy, sell or sit tight?
We turn to a commentator from the American Midwest, Mr. Barry Arnold. He publishes The Primary Trend from his investment counselling offices in Milwaukee, Wisconsin.
He is convinced that we are in a long-term bull market (see Daily Buy-Sell Adviser, April 29). And he wrote this article before the mayhem of the past 10 days.
Yet he anticipated a correction and even did a little profit taking.
His most surprising conclusion, however, may be this. The idea of “selling in May and going away” is pure bunk.
We begin by updating two gold stocks, one of them Canadian, that this editor has in the Special Situation and Turnaround part of his portfolio.
Gold moves up
Mr. Arnold purchased shares of Barrick Gold (TSX/NYSE-ABX) up to October 30, 2009 at an average cost of $35.90.
He has seen those shares appreciate by over 10 per cent.
They have passed the editor’s buy limit of $40 and are trading at $44.73. The stock yields 1 per cent on the $0.42 dividend.
Since even this bull believes investors must have some gold, he also holds American giant Newmont Mining (NYSE-NEM). It has been a little less stable than Barrick. Sitting as high as $59.57 on May 12, it is now at $52.34, yielding 0.8 per cent on its 40-cent dividend.
As the markets got off to another ragged start today, the price of gold has moved up more than $5 as we write.
Blaring headlines
Want some blaring headlines?
Goldman Sachs is good for a few of them every week as the Senate and the SEC dig into its derivative policies.
The fallout from Greek debt — and the debts of Spain, Portugal, Ireland and Italy — seems to hang over the markets like a cloud of volcanic ash.
The oil spill in the Gulf is a month old, and it won’t go away either.
Banks across the world are getting nervous about lending and have raised their rates.
To these, Mr. Arnold adds the often-contradictory figures that come up in the U.S. on unemployment and housing starts.
All of this, he wrote a short time ago, could justify a 10 to 15 per cent fall in the Dow Jones and the S&P 500.
Wham! The Dow has hit its lowest level in three months. It has slipped below 10,000 today, while the S&P 500 is around 1,053.
New highs, new lows
Yet while investors have been preparing for another bear, “market internals” still scream “bull,” insists Mr. Arnold.
As he wrote, all the major market indices other than utilities were trading in synch, which is normally a bull signal.
Both the daily and weekly Advance-Decline indicators hit all time highs in late April and early May. “These technical indicators usually peak several months ahead of a peak in stock prices,” he says.
What’s more, the number of stocks hitting new 52-week highs was expanding. New lows exceeding new highs anytime soon would be a “red flag,” the editor admits.
A great time to invest
In late April, Mr. Arnold did take profits on several stocks that had returned 80 per cent for he and his clients in less than a year — FedEx Corp. (NYSE-FDX) and Disney Corp. (NYSE-DIS). Since then, FedEx has lost $16 off its share price and Disney about $5.
In this, he follows the advice of legendary investor Bernard Baruch. “I made my money by selling too soon.”
But there is a big difference between taking profits in a calm market and taking losses by selling into a panicky one.
Nor is it a good idea to sell up and “go away” just because it’s May, Mr. Arnold states. There are two reasons for that.
One, he is convinced that a market correction today is simply a bearish tumble in the midst of a long bull market.
Two, spring and summer is a great time to invest. Since 1950, statistics have generally shown that the best returns on the stock market have come from November to April. In the past, the editor agreed.
But when he traced the Dow Jones Industrial Average back to its origins in 1987, over some 113 years, he found a different story. On average, the Dow’s best month has been July, with a 1.44 per cent gain. The three best months have been June to August, at 3.16 per cent. And the best six months have been March to August, with a gain of over 5 per cent.
Yes, this is all based on the law of averages, he admits. But he still believes the market has the momentum to overcome the bad headlines. And corporate earnings have been very good, he reminds us.
If this analyst is right, a strong market will overcome even the most pessimistic headlines. Instead of selling into a falling market, he would advise buying lower-priced bargains for the summer months ahead.
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