There’s a phrase I use so often my subscribers can probably repeat it in their sleep. But I’ll use it again right now, because it applies perfectly to the present stock market: Buy on pullbacks only!
Buoyed at first by the hope — and now by the reality — that the European Union would enact another round of bailouts and credit easing, the headline U.S. stock indexes have climbed smartly since June 1. During that period, the S&P 500 has tacked on 7%, almost a good year’s work in a little over a month.
That’s an encouraging performance, especially at a time when many gauges have been pointing to a rather abrupt economic slowdown both at home and abroad. (Last week it was reported that the ISM purchasing managers index for the service sector took a nosedive in June, confirming the weak ISM figure Tuesday from the manufacturing sector.)
If the market can hold up this well despite an onslaught of depressing news, the odds favor additional gains later in the summer. However, many of my short-term technical indicators are now overbought, a signal that prices have risen a little too far, too fast. So the bull needs a brief rest, perhaps extending through mid-month, before lunging into the next stage of the advance.
Hence my advice to buy on pullbacks only. The lower the price you pay, the bigger your future return (and the lower your risk if something goes wrong).
For mutual fund investors, I suggest waiting until the S&P retreats to 1348 or less. That would constitute a 5% dip from the year’s high, set in early April.
Individual stocks will, of course, follow their own rhythm, driven partly by the overall market and partly by specific news affecting each company. Among our model portfolio stocks, for instance, Occidental Petroleum (NYSE:OXY) already looks cheap.
A new name that would interest me at slightly lower levels is industrial conglomerate Dover Corp. (NYSE:DOV). Dover boasts a strong balance sheet, with lots of cash and modest debt. Analysts estimate that FY12 earnings will climb a robust 9%, to an all-time record. This outfit has also sweetened its dividend 56 years in a row, the fourth-longest record among all publicly traded companies. Current yield: 2.3%.