Breakout

Market Shows Signs of a Pullback: Time to Buy or Sell?

Breakout

The U.S. market followed Europe's lead, taking another tumble on Wednesday. The Dow Jones Industrial Average fell roughly 1%, down 124 points to 13,075; posting only its second triple-digit loss this year. The S&P 500 fell 1% to 1,399, and the Nasdaq took the hardest hit falling 1.5% to 3,068; its steepest loss of the year.

Energy (XLE), Financials (XLF), and Technology (XLK) lead the declines, while Telecoms were the only S&P sector to remain in positive territory for the day.

A weak bond auction in Spain fueled concerns about the ongoing Eurozone debt crisis, overshadowing a strong report on private payroll growth in the U.S. The latest ADP figures showed 209,000 jobs were added in March and an upwardly revised 230,000 in February.

So, is this the beginning of the highly anticipated pullback? And if so, should sidelined investors buy now?

"We wouldn't necessarily be chasing this market because it really is subject to the whims of the Federal Reserve board as we saw the other day with the release of the minutes from the March meeting," says Charlie Smith, chief investment office at Fort Pitt Capital. "We think we could see a replay of what we saw in 2011."

Smith entered 2012 with a relatively modest target of 1400 for the S&P 500, $100 in earnings growth, and a 14x multiple. Despite the S&P's 11% rally year-to-date, he's not buying the bullish case for stocks.

"The European issues, the cycle for the return of the European problems gets shorter and shorter every time," he says. "We saw some problems with a recent bond auction in Spain. I think there are enough negatives out there to keep the bearish sentiment at or near the surface."

Smith believes a shift into more defensive stocks is underway. He points to a China slowdown causing weakness in the Energy and Materials sector (XLB), and technical weakness in Oil Services (OIH).

"To see the marketplace switch back towards Utilities (XLU) and Consumer non-durables wouldn't surprise me at all," he says. "That would be the pattern we've seen the last time we saw broader weakness in the world economy."

Even if you're more optimistic on the strength of the global economy, Smith has some advice worth listening to.

"The only way you're going to be a successful investor is to figure out what you think a business is worth and then be willing to be patient enough to wait until it comes to you in terms of price. Allowing yourself to get caught up in the crowd is a dangerous, dangerous route."

Are you buying stocks on this week's small pullback? Let us know your thoughts in the comment section below or visit us on Facebook.

Rates

View Comments (101)