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Despite Summer Stock Blues, Market Pros Say Don't Panic

Despite this week's losses, advisors caution against reading much into a low-volume market,

The stock selloff likely came in part from the Fed confirming that the economy was not recovering quickly.

While the stock market may look like it was panicking over a possible double-dip recession, this week's selloff may simply be the normal volatility of a range-bound market during August.

Stocks have been in sell-off mode since Tuesday afternoon, when the Federal Reserve issued another warningabout weak economic conditions and said it would continue buying up government debt to keep interest rates low.

While the central bank's statement contained little that was new, Wall Street took the opportunity to sell after a July rally that saw the major averages surge 7 percent. Talk immediately began to spread about the possibility of a second leg down in the recession.

"What is it that the Fed told us that we didn't already know? What is it that has us panicked?" asks Art Hogan, managing director at Jefferies in Boston. "What the Fed really did was confirm our concern that this soft patch is persistent."

AP

In fact, some think the fact that the Fed wasn't more worried and didn't promise more aggressive measures may have sparked the sell-off, which saw the averages lose about 0.5 percent Tuesday, add another 2.5 percent Wednesday, then pile on the losses Thursday.

"The Fed has not extended quantitative easing. It merely extended the process within their regiment of purchasing debt and holding debt on its balance sheet," says John Stoltzfus, chief strategist at Ticonderoga Securities in New York. "The market didn't like it. The market apparently was looking for some sort of expansion."

Yet despite all this week's damage, the Standard & Poor's 500 is trading at just about the same level as May 21—right as the previous quarter's earnings seasonwas drawing to a close.

The bad news is that the market then was in the early stages of an aggressive downtrend that would take it into correction mode before stopping on July 1—just before this quarter's earnings season began.

"We're in a period now where we're two months away from the next earnings reports," says Uri Landesman, president of Platinum Partners hedge fund in New York. "The data's bad, the central banks are telling you we're in trouble, they don't have much left they can do. There's zero confidence that the government or Fed really has a clue."

Landesman is among the more pessimistic of market pros as he sees the S&P potentially dropping all the way to 950—but then believes it will recover when it makes a new bottom on the range.

Indeed, Dow Theory seems to suggestthat the bluechip average could sink lower. Two closely watched Dow metrics—the transportation index and volume—are indicating the 30-stock index is on the brink of a downtrend.

Transports are off more than 4 percent in August after outpacing the July rally. Volume, meanwhile, has spiked on down days, much the way it did Wednesday during the selloff.

Even then, though, volume was comparatively soft, and the jury remains out on whether any meaningful conclusions can be drawn about market behavior until after investors come back from summer vacation.

"What you're really getting on down days is correlated selling—everything goes down the same percentage," Hogan says. "We're going to know a whole lot more in overall tone of the marketplace after Labor Day, when we get fuller participation."

Similarly, Stoltzfus warns about trusting historic barometers when the market is under substantial influence from outside factors such as the Fed.

"The standard metrics will be challenged by the recovery process for the simple reason that this process is significantly distorted by concerted efforts of central banks," he says. "At the same time, it will parallel recoveries coming out of recessions where you have significant momentum coming out of the box and then false reads along the way."

For now, though, the trend seems to be lower, though investors may be best off not trying to read too much into moves in either direction.

"The reality is we're slogging through a lot right now," says Susan Fulton, principal of FBB Capital Partners, of Bethesda, Md. Fulton is advising clients to hold equal allocations of stocks and bonds, with a bias toward dividend and cash flow.

"We probably will be for a foreseeable length of time. We've had overextended credit for 20 years and that's going to take a long time to get out of the system," she adds. "You just keep on keeping on. If you don't play, you can't win."