"Finally, don't take last week's action as the start of a major bear market.
Downside risk among the big cap stocks is fairly limited -- perhaps to 5% or so.
And even if we see that 5% clawback, we still expect small caps to hold up
fairly well. The market is as oversold as it has been since 1990 or 1987, so
even in the large cap arena, we are due for an upward bounce.
Keep in mind that we still may get a break on energy prices. If oil drops to
$120-125, that could trigger a very nice rally. Such a downturn in oil would be
a countertrend rally -- not a rally we would chase -- but one that would
generate some correction in the energy stocks.
The exception in this event would be refiners. The action lately has been
noteworthy in that the refining stocks have broken away from the rest of the
energy herd. A fall in the oil prices to $120 or so could send stocks like
Valero and Sunoco up 20-30% in short order. (Admittedly, neither of these stocks
are among our investment picks, but traders could find opportunities in them.)
Bottom line: in this market you need to choose your positions carefully, and
the best opportunities are in oil and gold. Buy both these commodities on dips,
and don't be afraid to chase gold. As for the rest of the market, stick to our
recommendations."
Incidentally, their recommendations have been quite accurate and profitable.
Wall Street began the third quarter by fluctuating Tuesday as investors looked
for bargains and also digested a report that showed U.S. manufacturers remain
under duress.
The toll higher commodities prices are taking on the economy was evident in a
report on manufacturing that showed companies are paying higher prices for fuel
and raw materials.
Stocks initially got a lift after the Institute for Supply Management said
manufacturing unexpectedly grew in June, but a closer look at the report showed
that the prices companies paid for fuel and materials last month continued to
grow, while demand for their products is shrinking.
The overall gain came on higher exports. Taken as a whole, the ISM report
turned out to be a disappointment.
"It feels like we continue to stretch and stretch until something snaps, and
that will continue to happen until we do something about oil," said Jack Ablin,
chief investment officer at Harris Private Bank. "This is a test of wills
between oil and stocks, and hopefully we're not on some kind of collision
course."
Investors were also disappointed by another drop in construction spending due
to the continuing slump
in housing . The Commerce Department said construction spending fell 0.4
percent, slightly less than economists' forecasts.
Right now there isn't enough obvious good news to awaken the bulls, and the
angst over the "next shoe to drop" should keep the upside potential on stocks
somewhat limited.
