Blog : Inflection Point for Stocks

by Peter Leeds on May 30th, 2016


Happy Memorial Day Weekend!

We are at an inflection point with stocks right now.  There is a lot going on with the markets, and both the domestic and international economies.

So, do we go higher from here, or are we about to face a serious correction?  Well, in the short term, the answer is probably neither.

Perhaps most telling is the failure for the major big-board markets to break their former highs, despite numerous attempts.  For example, the NASDAQ's peak this year was 5,231 in July, and upward moves in October and November didn't quite bring the index back to their former glory.  

Each time, the NASDAQ subsequently fell off to lower levels.  More recently, the market again attempted another run, only to stall out twice so far just below 5,000.  This month's charge has even fallen short of April's highs.

The same kind of "fading" or weakening strength has also been playing out with the DJIA and S&P 500 Index.  In other words, we are seeing resilience and stamina, but falling short of reaching the heights we saw from earlier in the year.

This kind of trading activity implies widespread weakness.  A lot of retail investors (regular people like you and I), as well as professional traders and institutional money managers, have been taking cash off the table.  Outflows in ETFs and major funds have reached record levels recently.

However, this is actually a good sign for what may be to come.  Investor sentiment is a contrarian indicator, so the more people expecting a decline, the greater the likelihood we'll see an increase.  

This is because when people are anticipating the worst, they often sell investments. This puts more cash on the sidelines which can come back in, while also pushing the value of investments down to undervalued levels.  Shares become oversold [as Peter explains in this video - Know When to Buy or Sell Any Penny Stock], while good news is ignored and bad news sees an overreaction among shareholders.

In other words, there are lots of great bargains out there, especially among low-priced, highly-speculative shares.  When most people aren't in the mood for risk, it is among penny stocks where ridiculously compelling bargains can be found.  For example, in this video, you can see how our recent pick soared within months, and why we suggest taking profits now.

"But, wait a minute," you may ask.  "It's May now.  Aren't I supposed to Sell in May and Go Away?"

Well, last year we had the opinion that it was the year to sell in May, as we discussed in this penny stock blog entry.

This year we are cautious, but there is a wildcard.  Specifically, the Federal Reserve, and all their games and tricks.  If they unleash "Quantitative Easing 4 (money printing)" then the stock markets will pop higher again, just like they did with QE1, QE2, and eventually QE3.  

However, the effect will be temporary and artificial.  It will do nothing to help the broader economy, but stock market investors will get the benefits once again.  Meanwhile, the overall economy (which actually feeds the stock market and the wealth of the nation) will continue to rust.

That is why there is such a discrepancy between Wall Street and Main Street.  Ask a stockbroker if the economy is fine, and you'll get a yes.  Ask a small business owner or regular "work-a-day Joe," and they'll paint an incredibly different picture.

Official government statistics seem to imply the economy is on the mend.  Line ups at job fairs and unemployment offices tell a different story.

Regardless, there has been a decided lack of trading activity as of late.  Yes, the weather just got better, and yes, families are gearing up for the summer schedule and vacations, and yes, there is a seasonality to stock market activity... but this is all going even beyond all of that.

The stock market has the feel of a ghost town quite frequently now.  Institutional investors have even been staying away, content to sit with millions on the sidelines.  Why are they so cautious?  Why are they waiting?

Well, as Peter explained previously, the one thing the markets hate more than bad news is uncertainty.  There is a very high levels of uncertainty right now, and that is keeping billions of dollars away.

For one, there is the 2016 Federal election.  While the outcome has already been decided [as Peter explains in the video - the 2016 Presidential Election Results], most people believe the media that this is a tight race.  As such, they are not sure what types of policies and leadership we'll have, come November, so prefer to watch and wait.

There is also the specter of negative interest rates, which we are already seeing in Japan and Europe.  Despite the Federal Reserves' implications that we will get a rate hike next month, they have also floated the idea of dipping into negative territory in recent days.  Peter explains "What are Negative Interest Rates?" in this video.

Then of course, the FED may indeed raise rates as they have long been intending.  Whether or not they finally do, and whether or not it shows that the economy is on the mend, or derails our weak recovery, the point is that there is significant uncertainty surrounding the situation.

Meanwhile, worker strikes in Africa, and wildfires in the Canadian Tar Sands are pushing global oil prices higher.  However, while the flames are still ravaging the regions throughout Alberta, the disruption to the oil sands has been minimized, and the risk premium tacked onto oil is diminishing.  Meanwhile, Iraq is increasing their own output, while the worldwide oil rig count has just recently shifted from a decreasing number of working rigs to an increasing number, which will slowly increase supply, and feed the oil glut.  

Ideally, aspects of uncertainty like these will be changed to actions and commitments.  Even more important than the action the FED takes is the fact that they actually DO take some sort of action - even if that means officially taking no action at all.

Once points of uncertainty are addressed, a massive amount of "cautious" money will flow back into this ghost town.  The earliest cash to do this will benefit from a buffet of hundreds or significantly undervalued bargains, especially among unloved, volatile penny stocks.

However, it may not make sense to simply buy any and every stock.  Rather, pinpoint specific companies and penny stocks which are showing expanding market share, ballooning revenues, and strongly improving financial ratios.  You can see high-quality, low-priced penny stocks just like this here.

After all, we are due for a big correction soon.  This theory exists whether you look at historical trends, the velocity of money and Q Ratio [as Peter explains here], or points of economic weakness.

However, when the big blue chip stocks are under pressure, there are often some incredible opportunities in tiny but high-quality penny stocks.  In fact, some of the picks that we're profiling will preserve your wealth, but also can soar in spite of and in many cases because of overall weakness in the economy.

Our new penny stock pick (which comes out tomorrow to subscribers of Peter Leeds Stock Picks) is no exception.

 

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