The first half of the year has been pretty awful for stock market investors. The S&P 500 was down about 5.5 percent in June, down 12 percent for the second quarter, and down about 8.5 percent for the year. We could experience another choppy quarter, but there is too much pessimism building—and I think the tide should turn by year-end.
We’ve seen a herd mentality among investors taking place for much of this year, as they flee all assets perceived as risky when negative news hits. The safe-haven play has been to buy the dollar, gold and U.S. Treasuries, and sell commodities and stocks.
Analysts continue to speculate about whether we will see a “double-dip” of the recession that started in 2007. The textbook definition of a recession is two quarters of negative GDP growth. We’ve actually had two straight quarters of positive GDP growth, at 5.6 percent in the fourth quarter of 2009 and 2.7 percent in the first quarter of 2010. If you go by academic measures, we aren’t in a recession.
For traders, a “double-dip” would mean a return to the stock market’s lows during 2007 – 2009. That is a real fear right now. There is a lot of money on the sidelines, and it’s not being put to work. Investors are hunkering down. Just when it seemed like the global economy was turning a corner, the European debt crisis created a new threat. In addition, the unwinding of government stimulus measures, the lack of job creation and continued problems in the U.S. housing market added stress. Fears China and other emerging countries could see a growth slowdown has also been thrown into the mix. It’s all created a great deal of pessimism. Confidence and employment go hand in hand and we need to see that. Without confidence, companies don’t hire.
There’s been a lot of dwelling on the negative, but not all the news is bad. On Wednesday, July 7, the Dow Jones Industrial Average surged 275 points amid signs Europe will take the necessary steps to deal with its problems, including reigning in spending. European Central Bank President Jean-Claude Trichet said investors were too pessimistic about the Eurozone’s ability to tackle the sovereign debt crisis, and supports European bank stress tests.
On the U.S. data front, retail sales showed a spark of life in June. The International Council of Shopping Centers estimated retail sales have risen an average of 4 percent in the first five months of the fiscal year, the fastest pace of growth in four years. Retail Metrics reported June same-store sales rose 3.5 percent in June after a 2.7 percent gain in May. On the jobs front, the Labor Department reported initial claims for jobless benefits declined by 21,000 to 454,000 in the week ended July 3.
We’ve had two months of economic growth, and nine months of expansion in manufacturing. Are we lean and mean? Yes. But at some point, companies will have to start hiring again. When employment levels improve, the stock market could really take off.
A Trading Affair for the S&P 500
For the third quarter, I think the market is likely to continue to trade in a range, and investors will likely continue to move with a herd mentality. The S&P 500 should see a trading affair with 950 on the low end of the range, and 1,100 – 1,140 on the high end. By the fourth quarter, however, I believe the mood will improve and the S&P should be back up to 1,200 or better by year-end.
As far as a trading strategy in the meantime, I recommend playing the range. Sell S&P 500 futures around 1,120 and buy around 935 – 940. Things won’t improve overnight, but I don’t feel we are going to slip back into a recession, or see new lows in the market.
Opportunities in Commodities
The stock market has had problems, but many commodities are doing much better this year. Each commodity has had its own unique supply and demand fundamentals, but there have been some good opportunities for investors this year. For example, coffee is up about 20 percent this year, orange juice is up more than 12 percent and gold is up more than 9 percent. Grains have recently sparked too; wheat is trading at $5 a bushel and soybeans at $9 a bushel, their highest levels since January.
As far as trading ideas, there has been a supply problem in coffee which may be overdone, but the market still looks bullish from a technical standpoint. In wheat and corn, I recommend buying on major dips. Watch rice too, it’s been beat up and should follow other grains higher.
Crude oil is a bit tough to call, but overall I’m slightly more bullish than bearish. I don’t think emerging market demand for energy will dry up, and hurricane activity that threatens production in the Gulf could cause price spikes. I would recommend trading a range between $70 – $80 in NYMEX futures. Come November, we could see $90, but I don’t expect prices above $100.
As far as gold, there are many reasons to own it and I don’t think the top is in yet. I’m a gold bug and I like gold regardless of what other commodities do, and regardless of what the stock market does. Gold has been a market darling and has been in a bull market for a decade. Gold is a safe-haven as well as an inflation hedge, and it’s a tangible asset that always has value. That doesn’t mean it will go straight up—some of its safe-haven bid will be unwound as investors move to riskier assets. However, gold could break $50 an ounce or even $100 and it wouldn’t change my mind. I see $1,300 as the next upside target.
Silver gets more complicated as it has industrial usage. It’s been lagging gold and the spread has widened. Follow manufacturing trends (particularly autos) for additional direction in silver, but I think $14.50 – $21 looks like a likely range for the rest of the year, with the top end of the range coming late in the fourth quarter.
In sum, I see the glass as half-full for the markets. Too many people are pessimistic and when sentiment tilts too far in one direction, it tends to shift. I think the market is reflecting some disappointment than we aren’t getting a “V”-shaped recovery. It’s more like a “U.” Slowly and steadily, there will be a recovery. There are no quick fixes but things are moving in the right direction.
I think if you position yourself on major dips, with proper risk-management in place, you could be rewarded well. When the tide turns, it could be big.
One thing I do know about the environment we are in–there’s no easy money to be made. You can’t throw a dart at a stock or commodity and watch it go up. Investing today requires finding the right opportunities in the markets and having the right skill and timing to trade them successfully. You have to be on your game!
Jeffrey Friedman is a Senior Market Strategist with Lind-Waldock based in Chicago. He can be reached via phone at 866-231-7811 or email at jfriedman@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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