Stocks Hit a Wall; What to Do Now

By George Leong

The sideways stock market that has been with us since late July doesn’t appear to want to change. Equities are somewhat in a dead market at this time.

Gold and silver are in a bear market. Equities continue to hold up with the blessing of the Federal Reserve, but I still sense there will be a correction of some magnitude on the horizon.

Since plowing to record highs on August 2, both the S&P 500 and Dow Industrials are taking a breather and waiting for the next step. So far, there is really nothing new that could make investors want to try for additional record highs. This is the dilemma at this time for equities.

Chart courtesy of www.StockCharts.com

The stock market could move higher by the year-end, but just not at the current pace. If the Federal Reserve scales back on its bond buying at its September meeting, we could see a correction. I doubt the reduction will happen in September, however—probably more like December.

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The current low trading volume suggests the equities market is also anticipating some stalling and a possible retrenchment in equities prices. A downward move of over five percent, while lower than what I want to see, would be a buying opportunity for investors to add equities to their positions.

At this juncture, the S&P 500 is down a mere 1.17% from its record high, versus 1.58% for the Dow Industrial. The ability of the indices to stay afloat is encouraging, but also dangerous.

Overseas in Japan, the Nikkei 225 has surprisingly held, despite what I continue to feel is a dangerous buildup of debt and risk to the country. The index is down 13% from its high, but I would still be hesitant to buy. An adjustment of over 25% would warm me up.

The low volume on U.S. exchanges also suggests that the institutional or “big” money has left the market and is likely waiting for a pullback before reentering.

This is also where I want your mindset to be. Be ready to buy on major weakness of over five percent.

Some may question why they should buy stocks if the Fed will be cutting its bond buying by the year-end. My counter would be that as long as the economy grows, I really don’t care if the bond tapering occurs now or in a year; as an investor, you want to see growth. It’s as simple as that.

Bond yields may go up 100 basis points, but unless you have tens of millions in liquid cash, I’m not going out to chase small yields. I would stick with the upside of equities.

This article Stocks Hit a Wall; What to Do Now was originally published at Investment Contrarians