Investors bailing out of stocks in anticipation of another big drop in prices may be making a big mistake. Instead, they should be buying, said Robert Nurock, publisher of the Astute Investor newsletter.
”When looked back upon, this period is likely to be seen as a time when investors should have been accumulating stocks rather than preparing for a substantial market decline,” he said.
Although the market probably will suffer another deep setback, it won`t happen until the Dow Jones industrial average breaks its old high of 1919.17 sometime before year-end, according to Nurock.
Once prices do fall, they`ll rebound sharply again in early 1987, he said. On Friday the Dow fell 5.06 points to close at 1886.53; for the week, prices actually rose 8.72 points.
Nurock bases his opinion on the high level of negative expectations among investors. Like many analysts, Nurock feels that whenever investor sentiment reaches either extreme, the market will move in the other direction.
In this case there`s also an unusually high level of cash available for investing, which could help propel prices. Some was taken out of the market after September`s price collapse, and some was removed by takeovers.
Nurock said: ”In general, investors appear to be in one of two camps:
those who expect the market to decline sharply once again, breaking its recent lows at a minimum, or those who are growing more optimistic but are looking for another downward reaction during which stocks will come down to more favorable buy points.
”We are not convinced either camp will be satisfied over the near term. In fact, we believe the probabilities favor further strength before there is a meaningful downward reaction.”
By the end of the year, Nurock believes the Dow could finish in the range of 1989 to 2006.
”If and when this target is met, it does not necessarily mean that the market`s up move will end there or that a severe downturn will begin,” he said. But he predicted prices will fall at least a little after reaching the new high.
Nurock is uncertain whether the new high will represent a ”market top,” which occurs before a significant downfall, possibly dropping the market into its trading range low of 1735 reached last April, or whether it`s a resting spot before prices climb as high as 2700.
Meanwhile, takeover fever has grasped the market again. This time changes in the tax law, which will take effect next year, have resulted in a last-minute rush of deals and rumors, leading to a trading frenzy. But individuals should be cautious.
According to William LeFevre, Advest Inc.`s strategist, a recent study suggests a professional arbitrager decides in 50 seconds, on average, whether to participate in a given takeover rumor, while the average individual investor takes a day and a half to make the same decision.
”Needless to say, a day and a half down the rumor road can mean many points up in the target stock. And if the rumor proves less true, as all too many do, then a potential tax loss has just been fabricated. The advice from here is leave the trading in those takeover rumors to the pros and stick to investing in solid situations for your own portfolio.”
