Stock Market Ready for Liquidation?

By: InvestmentContrarian

George Leong writes: I advise you to look at buying stocks—but not quite yet; the time for buying hasn’t arrived. Just like a fire or liquidation sale at a retailer, the best buying opportunity in the stock market is when the discounts are at their heaviest. We’re not at that point yet.

As I have noted in my commentaries following the Federal Reserve Chairman’s recently proposed exit plan for the Fed’s bond buying and its effect on interest rates, the stage is set for the stock market to readjust to the norm. By this, I mean the rapid gains we have seen in the stock market over the past few years—specifically this year—are soon to be a thing of the past.

With the Fed planning to scale back on its monetary stimulus and, in turn, drive up bond yields, I do not envision a massive and sustained period of selling in the stock market, but instead a brief opportunity to buy some discounted stocks sometime on the near horizon.

Some are calling for a bear market to surface, but I don’t agree. While the Fed’s money printing may soon be over, as long as interest rates remain low and the economic renewal is actually in place, we could see an upward move in corporate America and the stock market—but it won’t come easily.

With the second quarter coming to an end this Friday, the focus will shift to the earning season, when I’ll again be looking at the revenue side to see if there’s any progress. Recall this year’s first quarter, when revenue growth in corporate America was weak and numerous companies fell short on revenues. The reality is that companies need to produce in order to support the equities prices.

Let’s take a look at the research by FactSet in its recent commentary (source: “Earnings Insight,” FactSet Research Systems Inc. web site, June 21, 2013):

Revenues for S&P 500 companies are estimated to grow a dismal 1.2% in the second quarter, down from a much higher 2.7% at the end of the first quarter. This slow growth doesn’t get my vote of confidence for corporate America; but it does indicate the continuation of low interest rates.

Earnings in the second quarter are estimated to grow at an anemic 1.1% versus the 4.3% seen at the end of the first quarter. This again is not encouraging, and suggests the U.S. economy is still fragile. In fact, based on the FactSet data, 87 S&P 500 companies have already provided negative earnings views—against only 21 with positive views.

The sectors with the weakest decline in earnings expectations include the materials (5.7% decline in expected earnings), information technology (down 6.3%), and the industrials (down 2.1%) sectors.

The financials sector, which I continue to like, is positive, expecting 17.7% earnings growth.

The second-quarter results could be messy for the stock market, but if stocks continue to correct, I would begin to look for some buying opportunities. If you want to take advantage, have some cash available.

This article Stock Market Ready for Liquidation? was originally published at Investment Contrarians

By George Leong, BA, B. Comm.
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

George Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. See George Leong Article Archives

Copyright © 2013 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.