@themarket: Don't Buy the Dips

The S&P 500 Index hit 1,900 this week. The Dow Jones Industrial and Transportation averages also reached new historical highs but the euphoria lasted about a minute and a half.

That's about as long as it took for traders to sell into the move. Not good.

The market gave the bulls all the excuses in the world to man-up and push the markets higher, as they backed and filled for two days, then the bears took over. Thursday was a blood bath and sellers added to the damage again on Friday. Not good.

Last year, if you recall, all I recommended readers to do is "buy the dips" whenever the stock market declined. Obviously, from this headline, I am recommending just the opposite today, especially in the so-called momentum stocks. Momentum, small-cap and mid-cap stocks continue to lead the markets lower. As it should be, since they have led the market up over the first three months of the year. Don't think that they have bottomed. In fact, sell any bounces in these names.

"I can't sell them now, they are down too much," retorted Chris, a friend and client, as we walked our dogs by the lake this morning.

It is an understandable attitude. The hardest thing to do is sell when you are underwater pricewise and down 40-50 percent from the highs. That little devil on your shoulder is whispering that if you just hold on you will recoup all your losses and then some. That may happen but in my experience too often the opposite occurs. Instead, you will end up watching those stocks drop another 30 percent before you finally sell in a fit of emotional disgust.

Another thing to remember is that many of these momentum names that hit astronomical prices had no business reaching that price in the first place. Expecting them to regain their former luster anytime soon is about on par with hitting the lottery next week. To me, it is far better to take losses now, sit on the sidelines in cash and wait until there truly signs of a bottom before buying back in.

If, on the other hand, you managed to avoid getting entangled in these high flyers, sit tight. You have raised the recommended cash. Sure, you will take some paper losses on the rest of your portfolio, but that will be a temporary condition. By the end of the year you should recoup those losses.

It is too hard to tell whether this week was the start of my forecasted 10-15 percent correction.

However, we are entering the third week in May (sell in May and go away) so whatever you do - don't buy the dip. If the markets follow the behaviorial pattern of the last several weeks, expect the market to bounce for a few days next week.

We have now hit my target of 1,900 on the S&P 500 Index. I actually expected a little further upside (20-30 points or so) once we hit that level but I'll settle for what I can get. And who knows, traders might try once again to break that 1,900 ceiling level and propel markets and emotions to higher highs. I don't care.

It feels to me like the markets are rolling over here. If that process has begun, I wish it would be a short, sharp and therefore less painful ordeal than a drawn-out affair that lasts through the summer. However, markets, as I have often said, will do what is most inconvenient for the greatest number of people.

Plan accordingly.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: A Shift in Leadership

Throw out the new, embrace the old, not something you see often on Wall Street. But as technology stocks and other high flyers continue to get trounced, utilities and other oldies but goodies are doing quite well.

When looking at the gyrations of the stock market indexes every day, it appears stocks are simply gaining one day and giving it all back the next. It would be easy to miss the sea change occurring right before our eyes.

Most readers are aware that the biotech sector, along with most new age technology areas, like 3D printing or cloud stocks, has been in the throes of a severe sell-off for over two months. If you review their technical charts, as I have, just about all of them look like death warmed over. Obviously, growth stocks are out and value is in. Those who have bucked that trend and attempted to pick the bottom in these groups have gotten their head handed to them.

However, utility, consumer durable, energy and other old economy sectors have risen as investors took profits in new age equities and invested the proceeds in these "low beta" stocks. Unfortunately for the overall market, that trend is not a good sign. It says that more and more investors are becoming cautious the closer we get to record highs.

One may have noticed, for example, that as the technology-heavy NASDAQ index, along with both the small and mid-cap Russell Indexes, have been declining steadily, the Dow hit record highs last week. The S&P 500 Index has also flirted with record highs and even now, after a so-so week, it is only 30 points from all-time highs.

If you look under the hood, you will find the explanation. Only one security of the top 12 most heavily-weighted stocks (all low-beta, defensive names) in the S&P 500 is exhibiting weakness. Over on the Dow Jones Industrial Average, most stocks that make up that average pay dividends and are also thought to be more defensive than the overall market. In essence, big money investors, especially professional players who have to be invested in equities, are hiding in these defensive areas. They are hoping that if the markets roll over, these stocks will get hurt less than the overall market.

Unfortunately, historical data tells us that even these stocks will ultimately succumb to selling pressure. It just takes a bit longer before the large, big cap value names follow the other indexes lower. The S&P is now in its 10th week of this process, which is the longest it has exhibited this behavior since 1994. The intra-day volatility is also increasing. Consider just one example. On Friday the NASDAQ rallied 0.80 percent in the first half hour of trading and then declined 0.50 percent before 10:45 a.m. The other averages are also experiencing these kinds of wild swings. Not good.

As for quarterly earnings, 736 US companies reported this week, and they have averaged a decline of 2.09 percent on their report days. The average stock that beat EPS estimates has gone up a mere 0.18 percent on its report day. But the average stock that has missed EPS this week has fallen 5.33 percent on its report day. Not good.

Given everything that is occurring in the stock market, I remain cautious and expect further volatility with a higher risk of downside in the weeks ahead.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Headlines Can Be Deceiving

It was a great April non-farm payrolls labor report. The headlines read that job growth in the Unites States increased at its fastest pace in over two years, while the unemployment rate fell to a five-year low.

Taking a peek beneath the headlines, however, all is not as it seems.

The report indicated that 288,000 jobs were created last month, dropping the jobless rate to 6.3 percent. That was above economists' expectation of a gain of 210,000 jobs. However, the number of workers looking for jobs declined by 806,000. Therefore, they are no longer counted in the employment statistics. Bottom line: a lot of Americans have given up hope in finding a job for good.

A breakdown of jobs was also more than a little disturbing. The most important age groups for jobs in America are those workers aged 25-54. They represent the bulk of our labor force as well as the most productive of all U.S. workers. The total number of their jobs fell from 95.36 million to 95.151 million - a drop of more than 200,000 jobs.

Employment for our younger workers also took a hit. Teenagers (16-19 years old) lost 24,000 jobs while those in the 20-24 age groups lost another 26,000. So who did gain those jobs?

Funny enough, it was workers, aged 55-69, who gained 174,000 jobs. Government was also hiring, and both construction and manufacturing saw employment gains.

Clearly, the economy stalled in the first quarter, as a result of a bad winter and had a deeper impact than first thought on unemployment. We will know exactly how bad when the government releases the next revision of first-quarter GDP growth. The last data point was growth of 0.1 percent. We might actually see negative growth for the quarter when all is said and done. However, I believe that the slowdown is behind us and that future quarters should see accelerating growth.

It is one of the reasons I believe that any pullback in the stock market will be contained over the next few months. The fundamentals of the economy will provide support for this market. Granted, we still need some kind of sell-off in the double-digit category to remove some of the excesses that have crept into overall valuations.

The markets also need time for economic growth to catch-up to market expectations. That process began in the beginning of the year. The sideways chop we have been living with since then is part of that process. A further decline that would last through most of the summer would be ideal. Who knows, maybe this century's madman, Vladimir Putin, may be the catalyst for such a fall.

I know that the majority of professionals are now expecting a sizeable pullback and being in the majority always makes me uncomfortable, but it doesn't make me wrong. I still expect the markets to grind higher, pushing stocks to record highs over the short-term. The Dow made its first record high of the year this week. The S&P 500 Index should breach 1,900 shortly. That's not saying much, since it is less than 20 points away from that level right now.

We could also see a bit of short covering once we make a new high. It could propel the S&P 500 a little further but after that, I am not expecting much. My most bullish case for the markets in the short-term is slightly higher highs with more sideways volatile action as May progresses. I am sure that on-going events in Ukraine will be supplying the volatility while day traders will continue to boost the markets higher until they don't.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Blood in the Streets

Investors began to focus on events in Ukraine this week as a continuing stalemate between Russia and the West erupted in gunfire. That bloodshed stopped the market dead in its tracks. The question is, for how long?

Up until now, the dispute over Ukrainian territory has been largely a war of words and an excuse to take the occasional profit every now and then. Investors are worried that might change. Here's what we know.

The international agreement forged in Geneva a week ago has broken down with both sides crying foul. We also know that several pro-Russian militants were shot dead at a roadside checkpoint on in an eastern Ukrainian city of Slovyansk on Thursday. It was result of the Kiev government’s military attempt to wrest back control of 10 cities that have been occupied by local insurgents (Russian military?).

Russia's response was to launch new military "exercises" along Ukraine's eastern border. Whether Vladimir Putin is preparing to invade the Ukraine in defense of its ethnic Russian citizenry or is simply bluffing is why the stock markets are on hold. Kiev, fearing an invasion, immediately halted its military offensive.

The fact that the U.S this week has committed hundreds of soldiers to its own military exercises in Eastern Europe simply adds to the tension. It is all well and good to pile on economic sanctions in reprisal for Russia’s new-found adventurism, but if even one of our boys takes a bullet over there, escalation would be immediate and quite dangerous.

Speaking of sanctions, it is obvious that measures levied by the West have not deterred Russia in the least. Granted, it is early days and if new sanctions are invoked, there could be some tough times ahead for the Russian economy. However, the private markets aren’t waiting. They are pummeling Russia’s financial markets in earnest.

The Russian stock market has declined 13.5 percent since the beginning of the year, while its currency, the ruble, has lost 8.8 percent of its value during the same time period. To make matters worse, Russia's economy was already slowing to only 1 percent GDP growth this year, prior to Putin's annexation of Crimea. Russia's central bank has been forced to raise interest rates twice to defend its falling currency and only today hiked them again to 7.5 percent on sovereign debt. That will compound the economy's problems.

At the same time, the debt credit agency Standard and Poor's, cut Russia's sovereign debt rating to its lowest investment grade, BBB-minus, just one step above "junk" status. That is sure to accelerate capital flight which, during the first quarter, topped $70 billion. But is this really a deterrent in the short-term?

Throughout history, the hunger for more political power has always trumped national economic consequences. In fact, the more misery heaped upon the Russian people, the more Vladimir Putin can blame the West. It would be similar to Hitler, who argued that it was Europe and the Jews that were responsible for Germany's post-WWI woes.

Given the reality of blood in the streets of Slovyansk, the stock market's reaction has been remarkably sedate. Many bears are just looking for an excuse to take this market lower. They argue that investors are simply not recognizing the level of risk involved in this confrontation. That may be so.

It is impressive that, instead of crumbling under this geo-political pressure, we find the S&P 500 Index is less than 30 points from its all-time high with the other averages at similar levels.

The bulls point to earnings as a reason to buy. There have been some upside surprises this week in earnings with some big name technology companies releasing surprising numbers. Of course, as is customary in the earnings game, expectations had been driven downward over the course of the last three months by Wall Street analysts, so that even the worst results managed to come in better than expected.

By now, you should be at least 30 percent cash. Clearly, the volatility in the markets is increasing. We are still in a wide trading range.  Russian risk is a concern and could generate more short-term selling. Keep your eye on gold and the yield of the U.S. 10-year Treasury note. If interest rates drop dramatically, while the gold price spikes higher, be prepared for further conflict overseas and a fast drop in the markets.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Easter Bunny Bounce

This holiday-shortened week saw a relief rally that began on Monday and carried through until Thursday. The markets still have further to go in the coming week before we once again reach the top of this four month long trading range.

The question that haunts both bulls and bears is when and in what direction will the markets finally break out or break down? As readers are aware, I believe that there is a high probability that stocks will do both in the weeks ahead. We could easily see the S&P 500 Index, for example, reach a new high, possibly 1,900 or beyond.

However, at some point this spring, that index and others will rollover. The resulting decline will be nasty, scary and absolutely meaningless in terms of this 2014's full-year returns. But the trading range will be broken on the downside, as a result. How bad could it get?

Let’s say the S&P 500 Index begins to rollover at 1,900. A 10 percent decline (190 points) would put the average at 1,710. A 15 percent sell-off would equal 1,615. That would simply put us back to the levels we enjoyed in October of last year.

Readers may recall that back then the Fed was still talking about tapering, although it wouldn't be until January that the Fed would begin to cut back on stimulus. Market commentators were warning that the market was overheated and due for a big pullback. Investors earlier that month were concerned that the government would be shut down (it was) and we would default on our debt. Job gains were modest at best and the strength of the economy was a question mark. Pimco's Bill Gross was writing that all risk assets were priced artificially high.

The point of this recent history in hindsight is that dropping 15 percent would only return us to a level where investors thought the markets were too high anyway. Since then, of course, many changes have occurred and all of them positive. Employment and the economy are showing great gains. Corporate earnings have increased. The political stalemate in Washington has at least quieted down. And the Fed has begun to taper but, contrary to popular opinion, interest rates have not sky rocketed.

Times change, however, since then we have risen almost 20 percent in six months. Seasonally we are not in October, but moving instead into spring. That is usually a down period in the markets (sell in May and go away) compounded this year by the mid-term election cycle (also a bad time for markets historically). We have not had a 10 percent correction in over two years — a market anomaly. Bottom line: we are set up for a pullback, but exactly when it occurs is a question no one can answer with any accuracy.

So far, the markets are following my playbook practically page by page. Stocks bounced off their lows on Friday and started this week in rally mood. The technology-heavy NASDAQ led the charge upward with the other averages following. At its low, NASDAQ had dropped almost 10 percent.

The last two weeks of April have been pretty good for the markets historically. All the tax selling is now out of the way and investors are re-establishing positions in various stocks. Chances are that we should re-test the recent highs and do so quickly. Hold on to your hats.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.