The North American stock markets continue to defy most experts with a
continued rise showing few signs of slowing down. Many, including
myself, believe that when a market continues to climb without any
pullbacks or hiccups, it usually means it is only a matter of time
before we see one. We are now entering the two worst months of the year
historically for investment returns, so this may be the catalyst the
market needs to pause and perhaps correct slightly, before resuming its
climb near the end of the year.
Some analysts have recently used the term “double dip” to describe the
pattern markets are taking — meaning the stock market would fall
sharply (which it has done), rebound off those lows very rapidly (which
we are experiencing right now), only to again fall sharply, possibly
retesting the low points set in March. Such experts believe the
catalyst for the market to pull back will be when the Federal Reserve
moves to raise rates and remove stimulus from the economy — a move
some believe Fed chairman Ben Bernanke will be forced to take to avoid
inflation.
In my opinion, there may be a seasonal type pullback in the markets but it will be nothing as bad as some analysts are forecasting. I have full confidence in the Federal Reserve and Mr. Bernanke. The Fed chairman was the right man to save the world from a catastrophe
and he will be the right person to know how and when to gradually
remove his foot from the stimulus pedal.
If most market analysts are correct and there will be a pullback at
some point in the near future, how should one invest? Should investors
even consider selling to avoid the pullback?
It is very difficult to sell in anticipation of a market decline
because investors won’t know when the rally will stop until after it
has. Many experts believe that the pullback will actually be more of a
temporary pause, a healthy correction that allows the market to climb
higher. So instead of selling off in anticipation of a market pause,
investors should look for investments that can withstand the dips and
go higher afterward. Investments that pay good dividends would be an
example. Perhaps shares of a company that is trading at discounted
levels, but whose downside risk remains limited enough to protect its
value from a drop in the market.
The only time I recommend an investor sell their shares in a company is
when that stock has reached the target you have set for it, or there
has been a significant change at the company that may negatively affect
the stock price. Investors should not make the mistake to sell a
quality company just because the market could have a pullback. In fact,
if a company is solid, one should use the price decline to buy more if
possible. This is how you build up positions in great companies.
If you have any questions regarding the above article or are
looking for an Investment Advisor to help you with your portfolio,
please send me an email at asmall@dundeesecurities.com. I will be glad
to speak with you.
Allan Small is an Investment Advisor with
Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not
an official publication of Dundee Securities and the author is not a
Dundee Securities analyst. The views expressed are those of the author
alone, and are not necessarily those of Dundee Securities or Metro Canada.
