Given the sharp fall in stocks, is it time to jump in or wait for further declines?
Definitely time to buy, says market and stock analyst Michael Painchaud at Market Profile Theorems, which is ranked number among independent research firms by Investars.com
. Specifically, Painchaud say's it's time for a trading buy ih anticipation of a market rebound that he says might play out over the next month or two. After that, given all the uncertainties, there's a good chance we may see a dismal second half.
What might break the negative spell? Painchaud believes another round of quantitative easing, or QE3, is a lock. Such a move by the Fed, or anticipation of it in the lead up to Fed meetings later this month, could provide the spark needed to turn around stocks.
"With the decline in the last employment report and GDP, and the fact that an election is coming up, the odds are better than 50% that we will see another round of easing," says Painchaud.
He favorite sector is technology, particularly chip stocks, for any contrarian maneuver towards a "risk on" trade now. "We continue to expect the first half of 2012 will close on a positive note, making the current price level extremely attractive," says Painchaud. I'll share some favored names below, but first a quick summary of why he's turned bullish on stocks, at least for now.
Insiders are saying the selling is overdone.
"The proportion of buys to sells has hit levels that are bullish," says Painchaud. A proprietary gauge he uses to measure insider sentiment has moved one standard deviation away from the mean -- a statistical extreme that signals a reversal in stocks may be in store. "This tends to define low-risk entry points. It suggests risk on," says Painchaud.
Investors are overly bearish.
Various measures show that individual investors, portfolio managers, newsletter writers, and traders have turned negative enough that it makes sense to bet against them as a contrarian play. Bearish sentiment has not turned to extreme negative levels, but it is close, and it is getting there.
Corporate earnings are holding up.
Despite the recent signs of weakness in the economy, momentum in reported earnings remains positive, year over year, and continued to improve in May. "This tends to support stock prices," says Painchaud.
Technical signs are turning bullish.
According to the technical indicators Painchaud uses -- measures of breadth, price, volume action, insider activity, price oscillators, and advance-decline lines in the major indices -- the market is oversold.
Technology stands out as the best place to look for buys for a risk on trade, says Painchaud. It's rarely ranked as high as it is now. Stocks ranking the highest as buys in his system include: Electronic Arts
(EA), a gaming software company; Extreme Networks
(EXTR) in networking; Geeknet
(GKNT), an online network and media company for tech geeks; and Applied Micro Circuits
(MCRL) and MoSys
(MOSY) in chips.
These stocks all rank "10" in his systems, the highest grade possible. Over the past 20 years, "10" ranked stocks have an annualized return of 17.7%, compared to 9.84% for the S&P 500. All results include dividends.
Just don't fall in love with these stocks if they do rally hard. Given all the uncertainties -- from the problems in Europe to questions about our own economy and the election outcome -- Painchaud expects a weak second half. He also thinks inflation may return to trouble investors. Plus the first year of the presidential election cycle tends to be a weak one for stocks, and investors may well begin pricing that in, by selling in the fall and early winter. Painchaud predicts these factors could send the Dow back to 11,000 and the S&P 500 down to 1,100, following any rebound that plays out over the next month or two.
No positions in stocks mentioned.
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