The Time to Buy is When Prices Pull Back

Market Summary

As long as the Democrats and Republicans fighting over debt, spending and taxes is somewhat relegated to sidelines, it is reasonable to expect the stock market to continue percolating higher. Investors appear to be discounting a budget crisis from the perspective that no one wants to believe that our elected officials will allow this issue get to get totally out of control and roil markets worldwide.  The major stock indexes are trading at the highest levels in five years. Domestic and global economic news have been the catalyst, especially Housing Starts, New Claims (at levels not seen since 2008), and a retail market that has bounced back from the lows of 2012. Last week it was announced that that equity funds, including exchange-traded funds (ETFs), took in $18.3 billion for the week ended Jan. 9, which is the fourth largest net inflows since Lipper began calculatiing weekly flows in January 1992. Some $10.8 billion poured into equity ETF's, while mutual funds took in more then $7.5 billion, their largest inflow since the week ended May 2, 2001.

Investor Analysis

All the recent buying has been supporting the markets. With treasury bonds not supplying the returns investors want, they are putting their money into stocks. However, it would be prudent to put this in the proper perspective. The record for equity fund inflows globally was the penultimate week of September 2007, when investors committed $23 billion. The market then briefly visited an all-time high, just before posting its worst year in modern history. Similarly, home-builders just had their best year since 2008. The market should be able to hold up for a while, but usually when the public comes crashing in late to the stock party, it is almost over.

Possible Strategy

Smart investors looking to benefit from the market's recent bullish move and limit the downside risk are stepping in to buy when prices pull back a bit. Take a look at the S&P 500 index daily chart above. After stocks crashed in the middle of November the market has continued to move higher with intermittent price pullbacks. The major stock indexes ended the year on a down note because traders stepped back and took vacation while Washington D.C. sorted out the 'fiscal cliff' mess. After the big two-day rally to start the year, stock prices are churning higher. You can see that investors are waiting on daily or intraday price dips and then stepping in to bid the prices back up. Follow a similar strategy, be patient and wait on a price dip to buy your shares.

By Gregory Clay