Friday, August 14, 2009

What do the markets and teeter-totter have in comon?

When I was growing up The single scariest thing to do in the local playground was the infamous teeter-totter. You got on and gently went up and down, but sometimes somebody got on with you that took you to the top and then jumped off. You could see them jump off, but for a second you were suspended in mid air just before you came crashing down. This past week was like the childhood teeter-totter in the park. One day we’re up and the prospects for the economy look great. The next day things didn’t look so great so the market went down. Well on Friday your friend jumped off leaving you up in the air and you knew that you were going to come crashing down. You also knew that it was not going to be a pleasant experience. So what happened on Friday that ruined your ride?

Consumer prices were flat in July as energy costs retreated following a big surge in June. Over the past 12 months, prices dropped the most in nearly six decades as the recession and lower energy costs kept a lid on inflation. The Commerce Department says consumer prices showed no changed in July, in line with analysts' expectations and far below the 0.7 percent jump in June. Prices fell 2.1 percent over the past 12 months, the biggest annual decline since a similar drop in the period ending in January 1950. Most of the past year's decline reflects energy prices falling 28.1 percent since peaking in July 2008.

Many market experts have been looking for some form of correction after the almost 50% run up in the market since the March low. The problem was that they have been looking for the correction for the last 15% of the market move. I also have been looking for a correction. After the S&P 500 hit 1,000 (May7) the market closed at 1,004 on Friday and has been higher but the correction is coming.

I suggested in a previous blog that the market would not have a serious correction until enough money from the sidelines had been sucked into the market. A significant amount of money has been drawn into the market, but not the level that I was looking for to come in from the sidelines. While we may see a continuation of the decline through the end of the month I do not expect to see the correction to be very deep.

Once this correction is over I would expect to see a run in the S&P 500 to close around 1,100 before we start down again. One of the phrases you hear again on the street is “Buy the Dips”. The logic in buying the dips is that the markets are going higher and every dip is the chance to get in before the market goes even higher. I think I have heard that saying more than once before, I think the person who said that was the person who jumped off the teeter-totter.

Well that person you got on the teeter-totter with is selling you the idea of buying the dips, but when they bail out you will come crashing with more than your bottom hurting.

Dan Perkins