Fear or greed?

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June Is Do-or-Die for Stocks

The Dow Jones Industrial Average dropped 300 points in two days to start last week, but managed to claw back almost every bit of that with a big snapback on Friday.

So was that the long-awaited pullback we have been waiting for, and a missed buying opportunity for those who stayed on the sidelines?

Or was that a sign that a bigger correction is nigh?

While I expect 2013 to finish as a good year with decent gains for the major indices, I think there are some serious growing pains in store for stocks in the near-term. That means traders should be especially cautious in June.

Here’s why:

Hindenburg Hype: A series of market breadth indicators that are closely watched by the bears signaled warning signs — most recently at the end of May. This so-called “Hindenburg Omen” has a decent track record — last confirmed in October 2007 before the market’s peak went up in smoke. While detractors are quick to point out there’s no sure-fire sign of a market collapse and that the Omen’s warning also flashed in 2010 with no flame-out, it’s certain some investors are looking for an excuse to flee after the front-loaded returns of 2013. So even if it’s just a sound bite that changes sentiment, the Hindenburg Omen matters.

Top-Line Trouble Persists: The narrative for Q1 earnings remained the same — decent earnings performance but fading top lines that failed to top expectations for a number of blue-chip stocks. Notable revenue misses include transport FedEx (FDX), telecom Verizon (VZ), financial Bank of America (BAC), chemicals stock 3M (MMM) and machinery giant Caterpillar (CAT). Having players like Google (GOOG) and Yahoo (YHOO) in there missing on sales is also bad, but such a cyclical list falling short on revenue is a disturbing sign.

China Uncertainty: Ugly China manufacturing numbers at the end of May were just the latest signs of turmoil in Asia — spanning everything form lagging GDP to the hubris of shooting for the top spot in the Skyscraper Index. China was perhaps the single growth engine of the global economy during the financial crisis, and its waning momentum and declining equity markets can’t be overlooked in 2013.

Tapering Talk: Whether you like it or not, a big driver of the push into equities since 2009 has been Federal Reserve policies that punish savers and bolster stock investments. And recent talk about “tapering” its quantitative easing policies — as soon as September, according to Goldman Sachs — has a real risk of rattling the market. Some investors are already front-running the central bank’s exit from loose monetary policy and stimulus measures, taking profits while they can.

Volatility Might Spark Fear: Investors have been complacent as the stock market has gone nowhere but up. After all, there were 20 straight Tuesdays in the green posted before the June 4 decline. But volatility facing stocks, commodities and currencies this summer — as prefaced by six triple-digit moves in the Dow across the previous nine sessions, before today — could change that complacency to uncertainty. After all, things can’t go up forever … and the simple idea that that market is “due” for a decline could make it a self-fulfilling prophecy once a few more down days are logged.

Again, this is not to say that the market can’t keep chugging higher. But the deck seems to be stacked against equities tacking on significant gains in the near-term, if you believe the headlines. If Wall Street can continue to climb this wall of worry, it will be off to the races …

But if not, we could see a decline — and sooner rather than later.

Related Reading

  • For the uber-bear case: Fund manager John P. Hussman says that, by the time the next bear market comes to an end, the S&P 500 will have given up its entire total return since 1997. (HussmanFunds.com)
  • One of my favorite indicators out there, if for its title if nothing else, is the CNNMoney Fear & Greed Index. It’s flashing “fear.” (CNNMoney)
  • Chart-watcher Sam Collins warns that the bear has one foot in the trap right now. (InvestorPlace.com)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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