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After more than 30 years in the investment arena, I can be certain about one thing: nothing goes straight up. So while I'm optimistic that the monetary and fiscal stimulus behind this most recent rally will have long-term benefits, I expect occasional dips in the market -- opportunities to join a rally you might have thought you missed.
But what will create openings for investors?
The most immediate one might be the second-quarter earnings pre-announcement period coming upon us. So far it's been tame, with only a few specialty retailers warning about second-quarter profits. Consensus expectations call for S&P 500 earnings growth just under 6 percent for the June quarter, but Wall Street cares more about what will happen next, so pay attention to what companies are saying about third quarter. The real test will come during the height of earnings season, in the weeks of July 14 and July 21, says Chuck Hill, First Call's director of research. Third quarter forecasts are in the 12.5 percent range, but earnings may fall short of that optimistic growth unless there's a sharp increase in economic activity soon. And if companies in July tell analysts to ratchet down their estimates, stocks could retreat and provide a better chance for buyers.
Insider selling by company executives, directors and anyone who holds more than 10 percent of the outstanding shares could be another buying opportunity. The Wall Street Journal last week reported that insiders sold more than $3.1 billion in shares in May, the largest wave of such selling in two years. Among them: Microsoft CEO Steve Ballmer, who sold almost $1 billion, and Dell Computer CEO Michael Dell, who disposed of about $350 million.
With the new rules regarding corporate disclosure, its not as easy for executives to share "guidance" information with analysts, so we're left to glean patterns from insider trading figures. Some think insider trading is a good barometer of the direction of the company and therefore the market. After all, who better than insiders to know what a company's near term outlook is like? Yet keep in mind that stock sales generally accelerate in May, as firms come out of their first quarter lock-up periods, when executives are prohibited from trading in their stock. And those executives always give "personal" reasons for their insider sales - new addition on the house, college tuition , rebalancing - the same reasons we give for ringing the cash register.
Another retreat to more attractive buying levels could come on the heels of weak economic data. Joshua Shapiro, chief economist of MFR, Inc. says upcoming data will likely look a bit better in comparison to past statistics that were affected by the war, the harsh winter and late Easter holiday. But going forward, data could very well point to an economy that continues to struggle in the face of continued overcapacity and a weak labor market. MFR predicts 2003 GDP will be a tepid 2.4 percet, down from last year's 2.9 percent.
And while the deflation argument has been all but debunked, the fact that it's on Federal Reserve Chairman Alan Greenspan's radar is enough to keep it on ours. Deflation is a pernicious condition, squeezing corporate profits and leading to layoffs, while consumers, anticipating even lower prices, put off purchases of goods and services, leading to more corporate discomfort and layoffs. But the Fed officials have said they'll do just about anything to avoid deflation. And in the past year, the dollar has lost ground against the yen and euro. While great for U.S. exporters, it acts as a tax on consumers desiring all those imported goods such as apparel and electronic goods. A slowdown in consumer spending in the face of rising prices may put a chill on the entire stock market and yield yet another opportunity to buy low, or at least lower than what shares are trading for now.
Our next broadcast will examine some various market scenarios: from noted market timer Elaine Garzarelli we'll get positives galore. She believes it's time to be aggressive and, well, stock up on stocks. The Henny Penny role will be played by renowned short-seller Bill Fleckenstein, who says this predictable rally won't last because of valuations that are still too high. Join us on Friday.
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