The tough part about predicting the stock market is that it’s not only reacting to what’s happening today, it’s looking forward to tomorrow. And sometimes it’s not exactly tomorrow, it could be six months from now, or twelve months from now. The other tough issue is that the market is going to dish out several good days on the way to completing its bear phase. Those head fakes will tempt some investors to put cash to work.
It’s not a bad thing to miss the first part of an improving trend to make certain that the trend is actually in place. In other words, let’s say you are interested in Apple stock, but it’s been falling every day. One day, it turns around and rises 5 points. Rather than buying right at that moment, it might pay to wait until you can associate the rise with some positive news.
Speaking of news, one sure sign that the market is ready to turn around is that instead of the market reacting as if all news is bad, it starts to rally on bad news. So to take Apple again, let’s say the expectation is that next quarter’s earnings will be down by a dollar, and instead earnings are down only seventy five cents. On the face of it, it’s bad that Apple’s earnings are down. But the market is going to read that as, ‘it’s not as bad as we thought! Buy!’
As far as market action these days, we’ve got small tailwinds going for the economy in lower oil prices and a declining yield on the long bond. Even the ten year yield – which is important for mortgage pricing – is down in yield. But stocks are not going to give us a turn until we see a few earnings reports that show that companies are able to handle higher materials and labor costs and possibly slowing growth. Some relief on the macroeconomic front might help temporarily, but that has to flow through to earnings at some point before investors will pay more for stocks.