Mixed and Confused About the Markets

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Right now, it’s tougher than usual to hear the market’s longer-term signals above the daily hum.  However, my basic thesis still seems intact.  The headline indexes are probably forming a temporary base in here, to be followed by a rally in June that should take the S&P 500 back into the upper 1300s, perhaps as far as 1400.

Then we’re likely to see another leg down, to new lows below the May 18 bottom.  (It would be out of character for the market to make its final low with the kind of urgent selling that ushered in the May 18 bottom.)  If we’re lucky and Europe doesn’t implode, the market’s summer low could set us up for a powerful recovery during the last months of the year.

Meanwhile, I advise you to buy selectively as long as the S&P remains below 1350, and hold off on any selling (or hedging) until the index has rebounded to 1380 or higher.

In your buying, emphasize stocks that pay a good dividend.  That cash-on-cash return will make it easier for you to ride through the market’s stomach-churning volatility.  Nothing calms the nerves better than a cascade of dividends rolling into your brokerage account, month after month.

Some dividend-paying stocks have gotten very expensive lately.  Beware of most names that hit the 52-week-highs list.  It’s too late to buy them with any reasonable expectation of double-digit returns in the year ahead.

On the other hand, plenty of solid businesses are trading at the middle of their 52-week price range, or below. That’s where you should concentrate your shopping.

Chevron (NYSE:CVX) and McDonald’s (NYSE:MCD) are two of my favorites, along with the newest addition to our model portfolio, Emerson Electric (NYSE:EMR).

Leave the more-aggressive plays for later.  While I’m pleased, for example, with the strong bounce in the gold-mining shares since their mid-month lows, I suspect they’ll revisit that bottom area during the summer.  No hurry to add to your stake now.

Likewise, I suggest waiting a bit before making any substantial new commitments to emerging markets (stocks).  As a group, the emerging markets touched a low for calendar year 2012 on Wednesday.  Chances are, they’ll begin to display improved relative strength as the market approaches its final summer bottom.  That will be the time to buy in earnest.

P.S. With all the howling about the Facebook (NASDAQ:FB) IPO, could the stock eventually be a contrarian buy?  Quite possibly.

However, even if we assume — generously, that FB’s sales triple over the next four years, and that the stock attracts the same valuation as Google (NASDAQ:GOOG) did at a similar stage in its corporate life, I can’t envision paying more than $23-$25 for FB.  There’s a lot to “like” about Facebook, but I’ll like it a lot more at a lower price!


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