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Buckle Up for Market Turbulence

Lackluster outing for the bulls. Yes, stocks did gain ground Tuesday, with the S&P 500 index tacking on 6 points.  But that’s after the index lost 21 points on Monday. Last week, the S&P climbed only 9 points Friday after dropping 30 on Thursday. Do you see a pattern here?

Right now, the market is finding it easier to fall than rise. Unless some remarkably cheerful development comes out of left field in the next day or two (Supreme Court’s Obamacare ruling pleases everybody?), stock prices will likely keep eroding into the first week of July. The descent could upset a few tummies, too. Fasten your seat belt!

Several of my measuring techniques are pointing to a bottom around 1250 on the S&P (about 5% below Tuesday’s 1320 close). In last Thursday’s blog, I mentioned a volatility calculation that suggested a low at 1254.

Alternatively, a 50% retracement of the October-to-April rally would leave us at 1248. A somewhat more complex reckoning (based on Fibonacci ratios) from the March 2009 low would pencil in a bottom at 1244.

I offer these numbers not as a hard-and-fast prediction, but to give you a rough idea of how much downside to plan for. At this point, it doesn’t appear that Europe’s problems are about to sandbag the U.S. economy and trigger a major, 2008-style decline in our equity market. So I expect to do some selective buying on weakness over the next five to seven trading days.

On the other hand, the market will have a lot to prove during July. As this chart shows, July and August have been the two strongest months for stocks in presidential election years since 1928.

The S&P should be able to stage a clean break above 1350 by mid- to late July.  (Last week’s abortive attempt obviously didn’t qualify.)  If the market is still wallowing a month from now, we’ll probably take additional defensive measures.

Meanwhile, if you’re hedging with ProShares UltraShort S&P 500 Fund (NYSE:SDS), I advise you to stick with your position.

On the buy side, I continue to give pride of place to high-yield bonds. They’re less volatile than stocks, and on a total-return basis (income plus capital appreciation), I expect “junk” to perform more or less in line with the stock market over the next 12 months.

Vanguard High-Yield Corporate Fund (MUTF:VWEHX) remains my top pick for folks who already have an account with the fund.  (VWEHX is closed to new investors.)  If you don’t have an account with VWEHX, go with MetWest High-Yield Bond Fund (MUTF:MWHYX), available without sales charge or transaction fee through leading discount brokers.

Among the companies we’re following, Emerson Electric (NYSE:EMR) said it expects the strong dollar to cut sales during the next quarter by $120 million. However, the company reaffirmed its profit guidance for the current fiscal year (ends September 30).

With manufacturing businesses like EMR, it’s important to remember that results can fluctuate considerably from quarter to quarter without disturbing the long-term growth trend. Over the past decade, Emerson has increased its operating cash flow by 88%.  Dividends have surged 79%.  That’s the kind of outfit you want to own if you’re thinking of long-term goals like retirement (or college education for your kids).

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