Daffy Mr. Dow Doesn’t Know Where To Go

by Richard Band | June 13, 2012 1:00 pm

Crazy as a loon!

It’s hard to describe the stock market in any other terms when the Dow can plunge 143 points (as it did Monday) and then rocket 162 points the very next session (Tuesday).  Even more inexplicable, the drop occurred after we got a piece of “good” news over the weekend (the EU’s $125 billion bailout of Spain’s banks) and the rally took place after Spain’s bond market cratered earlier Tuesday.

The only real conclusion we can draw from all this volatility is that most investors don’t know what to believe. Hope and fear take turns driving the market from day to day, but fear seems to be the dominant emotion in the back of investors’ (indeed, most ordinary citizens’) minds.

You can detect the level of fear among the general population in some recent polling data[1] from the Rasmussen organization, a topnotch survey firm (I pay more attention to Rasmussen than to all other pollsters combined). Rasmussen found that 42% of Americans are worried they’ll lose money they’ve deposited in the bank.

A companion survey by the same outfit revealed that 43% are “very worried” the federal government will run out of cash—presumably the cash to pay these folks’ salaries or benefits.

In the financial markets, fear is a curious, ambivalent thing. Most of the time, a predominance of fear indicates that stocks are nearing an important low. Once in a while, however (think October 2008), fear turns to panic and takes on a life of its own. Selling begets selling, and prices fall to depths unimaginable to a rational, detached observer.

What will be the outcome this time? I’m hopeful that the headline indexes will trace out a solid bottom sometime this summer, to be followed by a brisk rally into the election (and possibly beyond).

For this scenario to play out, though, we need to see a couple of developments. First, the market should gain some further ground through the end of this week. Preferably, the S&P 500 will bounce back to at least 1350. A little more would be even better.

Then, starting next week or the week after, we should get a choppy pullback that takes the indexes moderately (2%-5%) below their June 1 lows. If the market can complete its bottoming process by mid-to-late July, it would be an extremely positive omen for the second half of the year.

For now, I recommend that you continue to focus your buying on defensive, dividend-rich stocks.  Be careful, however, not to overpay for safety.

One name that has run a little too far ahead of its fundamentals is Abbott (NYSE:ABT[2]). ABT has zoomed 20% in the past year, versus a gain of less than 2% for the S&P 500.

I understand why investors are enthusiastic: ABT pays a secure dividend, and the company plans to split itself in two later this year, which should enhance shareholder value.

But too much is too much. Let’s sell ABT and pocket any profits. We can always come back later, probably after the split, when Abbott’s medical-devices business will stand on its own. I’m not really interested in owning ABT’s slow-growing pharmaceutical business, which has introduced very few new drugs in the past five years.

If the Abbott sale will leave you with more cash than you feel comfortable with, consider plowing some of the proceeds into Johnson & Johnson (NYSE:JNJ[3]).

In contrast to ABT, JNJ has lagged the market indexes over the past year. As a result, the stock now trades at its lowest P/E, relative to the large-cap pharma group, in five years. JNJ also throws off a juicy 3.9% dividend, and the payout has been sweetened 50 years in a row.

  1. recent polling data: http://www.rasmussenreports.com/public_content/business/general_business/june_2012/new_high_42_worried_they_ll_lose_their_money_due_to_bank_failure
  2. ABT: https://profitableinvesting.investorplace.com/getaquote/?STOCK_VAR=ABT
  3. JNJ: https://profitableinvesting.investorplace.com/getaquote/?STOCK_VAR=JNJ

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