One clear theme that has been in place throughout the second
quarter: The broader
should make you cautious, while individual stock bargains abound.
I've been hammering home these seemingly contradicting themes,
highlighting the need to keep seeking out entry and exit points for
the stocks you own and the stocks you are researching.
Well, a just-released economic indicator brings even greater
emphasis on the "exit" part of your trading activities. It paints a
picture of a tough summer ahead, and as we head into
, and you should be prepared to be taking profits whenever they
emerge. (There is a silver lining of this coming period though, as
I mention in a moment).
The economic indicator I'm talking about: The Chicago Fed
(CFNAI). Four months ago,
this was one of three economic indicators I closely track.
The index is "a monthly snapshot of the economic growth rate. It
gathers 85 inputs, covering virtually every aspect of the U.S.
and translates it all into one handy number," I wrote then.
In effect, this number portends what the widely-tracked
gross domestic product (
reading will look like. In recent months, this figure has steadily
weakened, which is why a number of economists say
will likely grow less than 2% in the current quarter (a first read
on second-quarter GDP will be released on July 27).
Economists say GDP growth will remain muted -- but positive --
for the rest of 2012. If the just-released CFNAI reading for May is
any indication, then I'm not so sure. The Chicago Fed notes that
for the index just slumped to -0.34,
the worst reading
since June 2011.
Does this imply we're headed for
? Perhaps. Economic indicators weakened in the spring and summer of
2011, but eventually snapped back, enabling our economy to keep
from moving into negative territory. This time around, however,
it's unclear whether we can count on any rebound. That's because
about the coming fiscal cliff has already begun to sap
business confidence, according to a few reports.
At this point, you should be concerned that the coming earnings
season will be dominated by more cautious outlooks. So even if
second-quarter results are solid, then investors may focus on a
dire outlook ahead.
This is why it's crucial that you remain prepared to book profits
on any holdings you have. The market has been gyrating during the
past few weeks, posting large gains or losses on any given day.
Whenever the market has spiked, you've had a chance to "sell into
Simply put, the S&P 500's move above 1,400 at the end of the
first quarter now looks like the high watermark for the year, in my
opinion. It would take a remarkable
of current economic trends to justify a fresh rally later this
year, which is hard to see right now. So the near-term outlook is
challenging as the economy slows, while the mid-term outlook is
also sobering due to the fiscal cliff and events in
The silver lining
Longer-term, there's ample reason for optimism, in large part
because companies will likely continue to operate in a very lean
fashion, generating solid margins and building cash levels ever
higher. In my 20 years following the market, I don't think I've
ever seen "corporate America" look quite so solid. U.S.
companies are extremely well-positioned to play leading roles in
the global economy -- when it gets healthier.
So even as I think profit-taking is the prudent stance for this
current market, I also think we are seeing stunning values emerge
-- if you are a long-term investor. That's why I don't want to own
any stocks that are richly-valued based on near-term operating
strength. Instead, I want to own stocks that are deeply undervalued
in the context of where the U.S. economy will be as we move into
the middle of the decade. This means banks, industrials,
commodities, housing and other beaten-down sectors (or at least any
stocks that have been crushed within these sectors). It's no
coincidence that my $100,000 Real-Money Portfolio owns stocks like
Freeport McMoran (NYSE:
. These are well-run companies with bright long-term
and discounted near-term valuations.
Risks to Consider:
Upside risks? They're hard tospot . A resolution to the crisis
in Europe would help avoid further global economic downdrafts. And
if Washington miraculously got its act together and enacted
bipartisan solutions to our current fiscal mess, then global
investors would pour into the U.S. market. Also, the Chinese
government is now stimulating its economy, which could provide a
sharp lift to
stocks in coming months.
Action to Take -->
You only score big multi-year gains when stocks are hated, as was
the case in late 2008 and early 2009. We're not quite there yet,
which is why I think this is a good time to raise cash. But if the
CFNAI reading is indeed a harbinger of even lower GDP forecasts to
come, then we will likely see the market fall to levels that we
used tocall a once-in-a-generation buying opportunity (which sadly
comes a lot more frequently these days).
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F, C, AA, FCX in one or more if its "real money"