Google's Bullish Acquisition
Last week's S&P 500 chart is unusual. After Monday's massive 80-point drop, the S&P 500 bounced in a huge range between 1,120 and 1,180. Volume was very heavy.
As we discussed over the last few days, the extreme volatility has been the result of a virtual perfect storm of uncertainty. The S&P downgrade, the last minute debt deal in Congress, the potential for recession and an escalation of debt issues in Europe.
The above chart also shows the S&P 500 was above 1,340 just a few weeks ago. At last week's lows, the S&P 500 was off around 17%. That's a sharp decline, no doubt.
To put the current levels of the S&P 500 in a little perspective, the highs for 2010 were just above 1,250. And the highs for 2009 were around 1,150. So at 1,180, the S&P 500 is in the range that it's been ever since it recovered from the 2008-2009 crash.
But whether that level means value or not depends on earnings. According to the Wall Street Journal, the S&P 500 is trading at 10.6 times projected earnings. That's cheap, no doubt about it. But of course, the reason it's cheap is that some investors do not believe earnings projections are accurate.
Yes, corporations have been beating estimates for 2 years now. And there are still skeptics. Eventually, they will be right, simply based on the "broken clock" theory. But up to an including this earnings season, expectations that earnings will miss projections have gone wanting.
As I continue to write: companies have adjusted their costs and production to meet current demand. Count me squarely in the camp that believes earnings growth can continue.
One way to measure value in the market is through acquisitions. When companies believe other companies are attractively valued and can help them grow, they buy them. That's why this morning's announcement that Google (Nasdaq:GOOG) is buying Motorola Mobility (NYSE:MMI) is bullish.
Buying Motorola Mobility gives Google a handset and tablet manufacturer. That means Google is now going directly after Apple market share. This will be very interesting.
The stock market is doing its best to shrug off the recent correction. But it's tough to say that it's all up from here. Corrections happen, and they will happen again...
Approximately 70% of trading on the NYSE is computer based institutional activity, we must understand that prices can be extremely volatile. I'm not sure this is a situation that can be "fixed." But as investors, there are a few things we can do to help ourselves sleep better when the stock market corrects, as it inevitably will.
Number 1: own good stocks. It's critical that we own stocks we can be confident about. That doesn't just mean blue chips. We can remain confident about small caps, dividend stocks, ETFs, and other if we understand the company completely.
Number 2: own some protection. Be it gold, an inverse ETF, put options, or something else, it's always a good idea to own some kind of protection for your portfolio holdings. There are a number of ways to initiate protection. You could add some assets that will rise as stocks fall when the market makes brand new highs and may pull back, you could add as the market fails to make new highs (as we saw recently), you could add protection on a seasonal basis ("sell in May" has been reliable lately, as has a late-July sell-off). Whatever timing mechanism you use, having downside protection can help alleviate the stress and the losses of a correction.
Number 3: Don't get fully invested. Keep some cash on hand to deploy when the market corrects. There will often be great opportunities to add quality during a correction. The key is to be patient and let it happen. Even in the strongest bull market, stocks will correct.
It's not always possible to pull off, but another way to manage a correction is to sell quick. Whether you keep tight stop losses, or have a quick trigger finger, you can exit riskier stocks quickly at the start of a correction.
After consulting with the research analyst at Small Cap Investor PRO, Tyler Laundon, we decided to employ this technique with one stock in the Small Cap Investor PRO portfolio. We took a 16% profit off the table, and then were able to re-enter the stock 21% lower than when we sold it. I expect we'll be back in the profit zone soon with this stock.
Selling early in a correction isn't always the easiest thing to do, but it can be effective.
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