Rolling over?

The S&P 500 is down 16.2% since April 23. Commentators all over are trying to peer into their crystal balls to figure out if the market is tanking, or just taking a breather before resuming its climb.

Data point in both directions.

The Chinese stock market is down much more than U.S. markets, but state manipulation makes that data point suspect.

Railroad figures continue to look good. They haven’t recovered summer 2008 highs, but they’ve been steadily heading in that direction.

Commodity prices have pulled back but haven’t broken down to levels that would suggest all hope is lost. Copper is below $3, but has paused around that level. Oil prices are over $70, just where Saudi Arabia wants it (suggesting demand is still strong). U.S. natural gas prices have been climbing since late February and are hitting new highs. Asian steel prices have declined since March, but have leveled off above prices of last summer. Dry bulk shipping prices have tanked, but that could be as much due to on-coming supply of ships as lower demand.

The Economic Cycle Research Institute’s (ECRI) Weekly Leading Index has declined to the point of many past recessions, but hasn’t crossed the threshold or time period to make recession certain.

Weekly unemployment claims are below 500,000, but not below the significant 400,000 level that frequently signals the sustained end of recessions.

What’s an investor to do in such situations?

First, remain calm. No one predicts recessions with precision, except in hindsight.

Second, stick to your discipline. If some of your investments look cheap, buy more. If others look expensive, sell some or all. Don’t try to time the market, evaluate prices relative to potential returns and buy when returns look good. You won’t catch the bottom, but no one but the lucky do anyway.

Third, plan to react to up or down side. It’s handy to have a plan instead of reacting emotionally. Feelings are an investor’s worst enemy. Decide what you’d do if prices took off (probably selling) and what you’d do if prices decline (probably buying), and then have the courage of your conviction when the time comes. Don’t change your plans based on how you feel, but on what you rationally think.

Investing is a game where cooler minds prevail. Don’t get emotional and don’t abandon your soberly made plans. In the long run, the next few months will probably look like an unmemorable blip on the computer screen. Invest wisely and you won’t care.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Interesting indicators

I don’t put a lot of faith into watching economic indicators. They seem to tell you more what has happened than what’s going to happen.

On the other hand, I do watch a couple specific industry indicators that do, in general, give me a flavor of what may be going on economically.

For instance, the price of copper is an interesting indication of worldwide demand for basic materials. Copper goes into so many things that watching copper prices gives me an interesting view into overall economic growth. Copper prices peaked in late August and have been holding relatively steady below that peak.

I also watch the price of oil and natural gas. Oil and gas are also fundamental inputs to many types of production, so watching their prices is also informative. Oil prices, which reflect global demand, peaked in early August and have been trending down. In contrast, U.S. natural gas prices, which reflect local demand, bottomed in late August and have been trending up.

The Baltic dry index, which reflects worldwide dry bulk shipping rates, bottomed in late September and have since climbed over 20%. This indicator lets me know how much shippers are charging to move large amount of dry bulk materials, like wheat or iron ore. When shippers are charging higher rates, worldwide demand is up.

Each week, the Association of American Railroads reports rail traffic for the U.S. and Canada. This indicator shows how many rail cars of containers, coal, bulk materials, etc. are moving around North America each week. This indicator recently peaked in early September and has been trending down over the last 4 weeks.

Add it all up, and what do you get? A mixed picture.

Copper prices are down only slightly. That could be due to higher copper production, lower demand, or some combination. It’s not a very bullish sign.

Oil prices are down, too, and this reflects global demand for a fundamental input to everything. This is also a bearish sign.

Natural gas is climbing again, which seems to be bullish for U.S. demand, but it could also reflect the huge slowdown in natural gas production that has occurred over the last year.

The Baltic dry index is up, which seems bullish for global demand. It could also reflect that global shippers are on the ropes with high debt loads.

Railroad traffic is down in the U.S., which seems a bit bearish, but seasonal factors may be impacting the numbers and traffic isn’t down by a large amount.

Do you see why watching economic indicators can be problematic. There are no obvious blinking lights and ringing bells. That’s part of the reason why economic forecasters and market strategists have such a lousy record of predicting even the direction, much less the magnitude, of markets.

One of my favorite jokes is that market strategists (who forecast market direction) are like diapers; they need frequent changing and for the same reason.

It looks like global demand may be doing better than U.S. demand. But, then again, maybe not.

That’s why the smartest thing to do is buy great companies at good prices or good companies at great prices and just ride the market up and down. It works.

Market and economic forecasting? Not so much.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.