During a CNN radio interview on Thursday, I was asked what it is going to take to get the market back on track. This was the day when we saw initial jobless claims surge to the highest level since the attacks of September 11.
What I explained to listeners was that at some point the average person, the middle class if you will, is going to become numb to the dire economic reports. Day after day we are bombarded with negative economic news...initial jobless claims hit seven-year high, retails sales set record drop, consumer confidence hits all-time low...
Back in 2002, the environment was much the same. Each day, investors were hit with negative story after negative story. At some point in the fall of 2002, investors became immune to the negative news and started buying goods as well as stocks. It's hard to pinpoint the exact time when this happened, but it did. Then in the spring of 2003, the market took off and the bull-run lasted for almost five years.
At some point, we will reach a similar conclusion to this economic slowdown. Investors will stop gauging their happiness and their stress level by the gyrations of Wall Street. The negative news will keep coming, but there will be little reaction.
I have mentioned in other articles that one thing we have coming up that could help is the change in leadership. A slight boost in consumer confidence would go a long way right now.
To some degree, we are already seeing a shift to indifference from the media. Two months ago, a 400-point drop would have been front-page news on practically every newspaper in the country. Last Wednesday's 411-point drop hardly grabbed any attention from the mainstream media. I know the local paper didn't have a huge headline with this news, nor did USA Today. Sure, the financial press was all over it, but they have no other choice for news.
People like to blame the media for numerous things. The belief being that the slant the media takes influences the public's reaction. This is probably true to some degree, but this is a case where the media can help. If the media becomes indifferent to bad economic reports, the average Joe isn't going to make the effort to go check their stocks or their 401(k).
The big boys may be the ones that control most of the money, but the middle class is heavily invested in the market thanks to defined benefit plans. Sure, they may just dump this money into mutual funds, but then the big boys are the ones that invest it on behave of the middle class. Over recent months, investors have been pulling money out of equity-based funds at alarming rates. In fact, since the week ended July 23, there has been one week that didn't see net outflows.
The institutional money may garner the bulk of the attention and it is certainly the cause of the wild gyrations, but when individual investors are pulling money out week after week, the institutions don't control nearly as much money. Once individual investors decide it is safe to go back in the water, the market will make its next run higher. The bottom will be reached when they stop pulling money out of equity funds.
My advice is to monitor the inflows and outflows of mutual funds. Once you see a slowdown on the outflows, it will be safe to start buying stocks again. I wouldn't wait until the inflows start ramping up, because as we know, the herd is usually late to the party when it comes to bull markets.
Good luck and good trading, Rick
