choppy market but stick with your long term outlook

The market is nervous as we head into seasonally challenging months of September and October. Last two days, two economic indicators are bothering the traders. One is productivity data which seems to be tapering off. Higher productivity is perceived as favorable as increased productivity acts to offset the higher energy and commodity prices and help economy to fight inflationary pressure. Another issue is rising wage, which tends to spur spending, causing inflation.

On the other hand, Fed Beige Book report shows slowing economic momentum in five out of 12 US district. The report cites slowing manufacturing and housing sector. This morning, home builders, KB homes and Beazar homes, pre-announces earning shortfall, noting rising home inventory and very tenuous housing market. These factors are worrying traders that the economy is slowing too much and earning from the US corporations is going to slow.

So again people are looking at the water glass as half empty: economy is slowing and inflation is still out there. Fed will raise again, slowing down the economy even further and killing the corporate earning in the process. In this type of choppy market, traders and hedgies rotate the sectors around according to the daily economic picture. If you are following this, you will more or less end up losing money. I believe that you need to have a long term view and stick with your strategy.

So what is my current belief on the market? I continue to believe that inflation will moderate due to slowing economy. Fed cites cooling housing sector and moderating energy price as mitigating factors for the inflationary pressure in their last meeting. Have you noticed that oil prices are now in $67 range? Barring another nasty hurricane, we are headed even lower with the oil price. I see oil trading below $60 by the early winter. This may save the consumer from tightening up too much for the critical holiday season. I believe that the economy is slowing but not entering into the recession. Slowing housing cools the construction activity and as the demand for the construction materials eases, basic metals and oil price see further downside. Stabilizing energy price and commodity will finally help Fed to terminate interest rate hike. If the economy is slowing enough, then we may actually see rate cut sometime next year.

Yes. We may see earning results not as good as previous Q’s as the economy is currently contracting. So I want you to for now stay with financials in which we may see some support to the downside by the prospect of Fed’s rate cut. Also biotech’s could be good as earning will not depend on the interest rate. If the US companies see slight decelerating earning momentum, investors may look abroad for more robust growth. As such, I think you should get some exposure to China whose economy is showing greater than 10% GDP growth (I will mention more about china later). Finally, techs are out of favor but I continue to look for a bargain in tech sector. Everything goes around in cycle and techs will be in vogue again if Fed pumps more liquidity into the market with rate cut next year.

In this spirit, I will talk about NVLS in my next stock message and show why I this tech stock for the long term.