Buy the Dip!


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S&P 500 futures were down kind of a lot this morning. And that’s not shocking considering the run it’s been on all year. The S&P 500 is up like 7% this month. In fact, it’s already beaten the year-end forecast from 12 of the 14 Wall Street strategists who offered up 2018 forecasts. 

Now, for the record, my 2018 forecast for the S&P 500 is 3,000. So I’m still in the running. And so you know, I’m pretty good at this predictions thing. Last year, I had one of the most bullish targets for the S&P 500, forecasting a high of 2,425 for 2017. It hit a high of 2,694.

2016 was my best — I had 2,275, and the high for the year was 2,277. Yeah, missed it by two points. 

I’ll tell you my secret, too. My forecasts are always based on earnings potential for the S&P 500. Ignore all the other noise — if companies can grow earnings, then the index will rise. And really, ever since the financial crisis, earnings have been poised to rise. Jobs numbers have steadily improved year after year, as have wages. The housing market has had its ups and downs, but the trajectory has been higher. And that means more loans and better earnings for banks. 

Plus, corporations have been streamlining production and buying back stock, both of which are good for earnings. 

The one wild card in my forecasts has been sentiment. But while many strategist-types felt that the somewhat negative sentiment during the post-crisis years was bearish, I’ve always seen room for improvement. That’s the way these things work. People slowly emerge from their financial crisis PTSD until we get back to business as normal. 

And frankly, I think that’s where we are now. For the first time in a decade, Americans can see a better future, where they make more money tomorrow than they did today. That is a significant change.

About That Rally…

So far this year, there’s been no shortage of bullish fundamentals supporting higher stock prices. We’ve got surging global growth, led by China’s renewed appetite for commodities. (Funny thing about that: Not many saw China’s growth picking up because the government there had been rigging the economic stats to hide the slowing economy. They did such a good job that they hid the recovery, too.) 

I will admit I did not expect the tax bill to get passed late last year. And I certainly didn’t expect it to trickle down to workers. But that’s actually happening. Companies are giving out raises and bonuses. So chalk taxes up as another bullish catalyst.

And then there’s earnings. The companies of the S&P 500 are posting their third quarter of double-digit earnings gains out of the last four quarters. That is phenomenal. And it should go without saying that the S&P 500 can easily jump 10% when earnings are also jumping 10%. In fact, you should expect it. 

But there always comes a point where all the good news is priced in and it’s time to take some money off the table.

Is that where we are now, time for a profit-taking pullback? Is that why stocks are selling off today? 

Look, we all KNOW this market will correct at some point. That’s how it works. Some kind of catalyst — a news item or a corporate warning — will come along and put the fear into everybody. And we also KNOW the longer we go without some kind of decline, the worse it will be. 

And the correction talk has definitely picked up in the financial media over the last few days (Goldman says risk is extreme, BofA says correction imminent). Seems to me people want to sell. They want to see a drop to relieve the pressure and offer up some better prices. (Sounds good, but it rarely works so smoothly. The minute stocks sell off for two days, investors will start freaking out as they wonder if the whole rally is done.)

But I’d warn you about making too much out of a day like today. The bearish talk from Goldman and BofA is just talk right now. They are in “CYA” mode, because they need to be able to say they told you this could happen if/when stocks get creamed. And don’t forget, too, that especially in Goldman’s case, Wall Street will definitely try to talk the markets down to give their big-dollar clients opportunity. 

Case in point: We’ve sure seen small declines get bought quickly — twice last week we saw 20-point drops bring out the buyers.

My Litmus Test

Now, I’ll tell you: I looked around for some downside plays before the market opened. I checked VIX calls (volatility/VIX goes up when stocks go down) and I mulled some put options on the gold ETF, GLD. 

But as I’m looking around, I realize I’m not particularly eager to take a downside position. Yeah, it might’ve worked for today. But the trade itself would have simply been a reaction to today’s market action rather than truly anticipating the market’s next move. 

Here’s what I mean…

First off, we have a State of the Union address tomorrow. You think stocks will sell off after that? Yeah, no. Though I won’t be surprised to see a gap higher on Wednesday bring out some sellers. 

But even then, it’s a huge week for earnings: Boeing, Apple, Google, Amazon, McDonald’s, Pfizer, D.R. Horton (housing), Facebook, International Paper, etc. Is there any reason to think the positive earnings trend is going to suddenly reverse? I don’t think so.

In fact, I’d say the opposite is true: We’re likely to see the earnings scenario improve, providing more fuel to the rally.

The bottom line is that I just burned 948 words to say: Buy the f^*$#!% dip!

Until next time,

brit''s sig

Briton Ryle

follow basic@BritonRyle on Twitter

An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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