Stocks' Late-Year Weakness Is No Surprise

 | Oct 25, 2012 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

spy

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apa

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bhi

There's going to be a lot of ink spilled in the days before the election -- lots of theories on how the outcome of this close race is affecting and will affect the stock market. But don't be confused and don't make too deep an analysis: This market has shown most of its limits for 2012, and I think it is destined to at best muddle along for the rest of the year.

It's not just the weak third-quarter earnings that have been streaming in. As a longtime veteran of the commodity markets who has an understanding of how they tend to react, this period of weakness is very predictable counterweight to the very strong performance that equities have treated us to for most of the year. In many ways, the market action is showing an uncanny correlation to 2011, when stocks performed well until the fourth quarter and lost much of their gains going into the start of 2012.

We can call this a healthy pullback if we want, we can call this the limitations of liquidity and quantitative easing to prop asset prices, we can call this the smart cashing in of winning positions in front of a still-insoluble fiscal cliff -- it doesn't really matter. All markets cycle, they have symptoms and feel different when they are under pressure, and they are under pressure now.

S&P 500 Daily
StockCharts.com

The short-term day-trader will be using the next few weeks to apply some simple biases to making some money in this type of market. For me, I am incredibly biased to sell SPDR S&P 500 (SPY) futures on any kind of up call in the morning, as the weight of market dynamics just tends to drop the morning's enthusiasm from the indices rather quickly during the day. And it hardly matters what the news is, whether there is a new Spanish financing deal in the offing or a couple of good quarterly reports from some tech sectors -- any good news will be jettisoned in a downward-cycling market.

A longer-term strategy is not as easy, but I tend to look for value stocks that are reaching a target price I have long had in mind as worthy of a punt. These change as market conditions change, but two energy companies on my radar and their target prices are Apache (APA) at $78 and Baker-Hughes (BHI) under $40. (These will come as no surprise to my regular readers.)

I'm not making any long predictions on the market, by the way. No "go short -- the world is ending" recommendations, nor "this is the dip to buy for your kids" ideas either. To me, this is a predictable and useful cycling of the market that should be expected and accepted -- and used to find some small opportunities if they present themselves.

By the way, one of the tools I will use to tell when this downward cycling is over is an old tried-and-true trader trick that has continued to work well for me for almost three decades. And yes, you need to read my Monday column to learn what that is.

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