Wall Street Poised for Profit-Taking

by John M. Curtis
(310) 204-8700

Copyright June 2, 2013
All Rights Reserved.                                      

          Gaining 23% for the first six months of 2013, all major stock indexes, including the Dow Jones Industrials, S&P 550 and Nasdaq, look ready for profit-taking, something Wall Street euphemistically calls a pullback or correction.  Predicting market downturns is never easy for small investors, competing with the nation’s biggest mutual, hedge and private equity funds that take their signal from investment banks like Goldman Sachs.  While Goldman Sach’s Senior Vice President Abby Joseph Cohen said the current bull market is for real, it doesn’t mean the big funds won’t take profits.  When the sell signal comes, small investors typically wake up on any given day to portfolios down over one percent or greater.  If the signal stays sell, the funds continue to sell-off for days, weeks or months, depending on the kinds of manufactured financial news that drives investors to the exits.

             Small investors are counseled to ride out the storms, with prevailing wisdom that you can’t time the markets, unless, of course, you happen to be insiders like Goldman Sachs or some other market-making investment bank.  With profits up in major indexes about 23%, some experts, even the bullish ones, anticipate broad-based sell-off to lock-in profits from the recent upswings.  “When we do get that eventual decline, and it will come, it will be most likely a pullback rather than a correction or a new bear market,” said Sam Stovall, chief equity strategist at New York-based S&P Capital IQ.  Improvements in corporate earnings, improved consumer sentiment and lowered unemployment have all created pro-growth conditions, usually spelling a protracted bull market.  Profit-taking scares some investors to bail-out of equities, despite what looks like a short-lived downturn.

             When major funds decide to sell-off, it’s typically blamed on external world events that have little or nothing to do with U.S. markets.  Investors need only to pay attention to headlines once the sell-off takes place to see that it rarely says “profit-taking” and instead focuses on things like a slowdown in China, unemployment in the Eurozone or some other catastrophic event.  “I think what investors forget is that we have had pullback basically every year since World War II and we’ve had a correction once every less-than-three years, on average,” said Stovall, minimizing the meltdowns like the two-year meltdown from 2008-2010 that halved many investors retirement accounts, especially those with a buy-and-hold strategy.  Investors have short memories when it comes to the pain of prolonged bear markets where inflated equity values come back down to earth.

             If the Federal Reserve Board is any guide, Fed Chairman Ben S. Bernanke has signaled he intends to keep the Federal Funds Rate, the wholesale rate banks pay for capital, to stay at zero-to-0.25 percent until at least 2015 or when unemployment drops to 6.5%.  When the Fed saw weakness in the economy, it announced Sept. 12, 2012 a new round of Treasury Bond purchases known as QE3.  Buying around $40 billion a month, Bernanke has rattled markets recently suggesting that QE3 could end sometime in 2013, dependent on the economy’s performance, especially a drop in unemployment.  Announcing that federal budget deficits would drop in 2013, the not-too-optimistic Congressional Budget Office predicted deficits would shrink in 2013 to under $600 billion, less than half of when President Barack Obama took office Jan. 10, 2009.  Yet the GOP stills insists scaling back government spending.

             When 10-year T-bills shot over 2% last week, it signaled positive expectations over future growth.  Most investors expect interest rates to rise at some point but market downturns can reverse that trend.  “Sell in May and go away” didn’t really apply in 2013, anticipating a June sell-off.  With the Dow up 1.86%, the S&P up 2.08% and Nasdaq up 3.82%, there’s plenty of room for a June pullback.  What goes up must go down when it comes to rapidly escalating equity prices.  No investor should be surprised to see a significant sell off over the next few months, taking major stock indexes down between 10%-20%.  “So to have decline of five to twenty percent is really not a strange thing,” said Stovall, reminding investors that no market can go straight up without profit-taking.  Wall Street has gone up nearly 100% since Obama took office.  More than 6 million jobs have been added since March 2010.

             Predicting market sell-offs isn’t for amateurs.  It seems unfair to small investors that only Wall Street kingpins like Goldman Sachs or J.P.Morgan get to sell at the same time, setting the latest round of profit-taking.  “I actually found that a greater the advance off of a prior pullback increases the chances that we end up with another pullback, rather than something deeper,” said Stovall, signaling that pullbacks lead to more buying.  Market sell-off help spur more bond buying, dropping consumer and real estate interest rates.  “The implication is that investors are buying into an improving economy,” noted Stovall, showing that pro-growth stock market policies lead to lower interest rates and more investors buying equities.  Without periodic profit-taking, equity prices would continue to escalate to unaffordable levels.  Profit-taking helps assure that investors keep their interest in stocks.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.