Tuesday, July 18th, 2006
Is this a proper war scare?
The violence in Lebanon has sparked a sell-off around the world’s market as Israel escalates its attack on the Middle Eastern country in a bid to flush out Hezbollah fighters.
Philip Fisher, whose book Common Stocks and Uncommon Profits we reviewed the other day, advocated buying growth stocks on ‘war scares’. “Our imagination is staggered by the utter horror of modern war,” Fisher wrote. “The result is that every time the international stresses of our world produce a war scare or an actual war, common stocks reflect it. This is a psychological phenomenon which makes little sense financially.”
FINANCIAL LUNACY
Fisher argues that government spending on war creates inflation so it was “financial lunacy” to sell stocks and move to cash. “Actually just the opposite should be done,” he advises. “If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying.”
The question is: are events in the Middle East creating a proper ‘war scare’ buying opportunity?
Firstly, a quick look at the US market reveals all the major indices, including the Dow, S&P500 and Nasdaq, are trading below their falling 50-day moving average and beneath their 50-week moving average, which is bearish. So buying stocks breaking out from sideways movements or to new highs (typical for CANSLIM-type strategies) is unlikely to work in these conditions.
But many growth-at-a-reasonable price (GARP) investors are likely to be looking closely at beaten down stocks of quality companies.
MANY EXPERTS BEARISH
Many market watchers, including technical analyst Martin Pring, argue that the recent falls have triggered the start of a bear market. “There are occurrences in the business cycle when the consensus of my proprietary primary trend indicators find themselves within the confines of the bearish camp,” he said in a recent article. “Unfortunately, now seems to be one of those occasions.” Pring said the last time technical, economic, and monetary indicators were aligned in such a negative fashion was at the turn of the millennium just before the dot com bubble burst.
Buying on war scares means buying on dips, which can be a risky strategy. Barry Ritholtz at the Big Picture noted in a technical round-up that at the moment “rallies are better to be sold than dips bought until internals improve measurably.” So buying on falls at the moment isn’t optimal.
UNITED STATES NOT INVOLVED YET
The current troubles in the Middle East also don’t yet involve the United States, so it is difficult to argue we’re actually experiencing a full-blown war scare. But the US and others could be dragged into the conflict soon, causing a serious market correction as was seen before the two Persian Gulf Wars.
Because that could happen caution is warranted (possibly using small amounts of cash as is Charle Kirk’s strategy) if you want to pick up stocks sold off in the current correction.
Coming soon: globalgrowthinvestor.com speaks with market-timing guru Dr Wish on how to create your own timing system
Word Count: 487. This entry was posted on Tuesday, July 18th, 2006 at 7:28 pm and is filed under Market direction, Philip Fisher. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
