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If this is a correction and if this is therefore a buying opportunity, how long do you wait?

That’s the most asked question I’m seeing in the comment sections of the Jubak Picks today.

My opinion?

I think we’ve got more downside next week. And I’m going to explain why in this post.

That said, I don’t think there’s any reason that you can’t nibble at stocks on your watch or buy lists here. Nothing wrong with buying a partial position in anything that’s down 5% or more. For example, Market Vectors Brazil Small Cap ETF (BRF), a consumer-stock oriented portfolio that I sold in December with an eye to re-buying, was down about 6% from my selling price as of the close today, January 22. Worth a nibble here? Sure. Do I think I will be able to get it cheaper next week? Yes. So make sure you save some cash—if you agree with the reasoning that I’m now going to lay out here—so that you can buy more if this correction has longer to run.

My method for telling if the correction will continue into next week is based on looking at the longevity of the news flow that spooked the market this week.

A lot of this week’s bad news won’t survive into next week as major fear factors.

For example, this week’s earnings reports were dominated by the big banks. The news from JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) wasn’t terrible, but it wasn’t good either. These banks continue to increase their reserves for bad loans but at a slower rate. The overall effect was to mask exactly how strong the economic recovery is for companies in other sectors. Next week, however, the list is dominated by technology companies (Texas Instruments (TXN), EMC (EMC), and Qualcomm (QCOM), for example) and industrial companies (Nucor (NUE), Boeing (BA), Caterpillar (CAT), for instance). That very different list will remind investors of what an earnings recovery looks like.  

The Obama administration’s plan to cut the big banks down to size will be a week older. The way the second week news flow usually develops is that the shock of the first week at what was proposed yields in the second week to wonkish discussions of the details. Much less threatening.

On the other hand, the major driving story this week—China’s efforts to restrain its economy before the train jumps the tracks–will still be out strong next week.

The steps that the Chinese government has taken so far—see my post for the details on what Beijing had done through Tuesday January 19—have been out run by events. These moves were responses to out of control bank lending in the first weeks of January. After those moves, the Chinese government announced that growth had hit 10.7% in the fourth quarter. That just inflamed fears that the country would have to do more of the same to restrict loan growth. And then Beijing announced numbers that raised fears that inflation is about to take off. Consumer price inflation, which ran at an annual rate of just 0.6% in November, jumped to an annual rate of 1.9% in December.

A 1.9% inflation rate is still low. A tripling of the inflation rate in just a month is scary.

Fighting inflation will require more dramatic steps than the government has taken so far. And in terms of the news cycle inflation in China is a fresh story angle that could keep worries about China’s growth on the top of investors’ minds for another week.

At some point after that, stocks will be cheap enough in emerging markets and in global sectors such as commodities that we’ll start to see stories about how fast the global economy—and company earnings– will grow even if China slams on the brakes and slows its economy to just 9% growth.

How many investors do you know that are just waiting for a 10% drop so they can get into the market?

And that, I expect, would mark the end of this correction.

Of course, this correction won’t be the last time in 2010 that markets go into worry mode over China’s growth prospects. We can expect to see the story again and to have the market hyperventilate repeatedly in 2010.