Shift in mood signals ugly markets -and buying opportunities

Now I know what Hef is going through. Like Playboy’s octogenarian founder, I feel like I’ve been jilted at the altar.

Along with my colleagues, Bill Mah and Dave Cooper, I’ve toiled for weeks on a Journal economic supplement that was published Wednesday.

Although it was full of all the appropriate warnings and caveats, it presented a decidedly upbeat longterm outlook for Alberta’s energyfired economy.

But just as our voluptuous 16-page labour of love hit the streets Wednesday, replete with gorgeous forecasts, tight quotes and eye-catching stats, what happens?

The equities markets got cold feet. Instead of a big wet smooch and a warm embrace, the fruit of our labours got the big brush-off.

Stock market indexes dropped like a stone, the loonie swooned and oil prices plunged. Ouch.

It was a snub worthy of Crystal Harris, the 25-year-old blond playmate who dumped Hugh days before their scheduled nuptials, leaving the poor ol’ horndog dreaming of what might have been.

OK, so I’m being a tad silly here. It was only one day in the markets, just another blip on the chart. Stock markets, oil prices and the loonie could rebound again by week’s end.

Besides, The Journal’s economic report focused on long-term trends, not what’s likely to happen over a single week or a month. And all the long-term trends in Alberta are pointing up.

Still, one does get the sense that there’s been a clear change in investor sentiment in recent weeks, and in the short term, things could get pretty ugly.

With the beleaguered U.S. economy slowing, Congress playing Russian roulette on hiking the U.S. debt ceiling and a possible Greek default looming, investors are getting cold sweats.

Buying the dips -which has been a sure-fire money-making strategy since the bull market began in March of 2009 -no longer seems like the smart thing to do.

With Toronto’s lead index plunging 126 points or one per cent Wednesday to 12,972.03, it now sits 9.5 per cent below its recent April high of 14,329.

If the index sheds just 76 more points, the pullback will reach 10 per cent -marking the first correction of the bull market. At 20 per cent, Canada will have re-entered official bear market territory.

In the U.S., where stock markets are far less weighted toward oil, natural gas, base metals and other commodities, major indexes have actually held up better. At Wednesday’s close of 11.897.27, the Dow Jones Industrial Average has lost just 980 points or 7.6 per cent since it peaked at 12,876 in early May.

In the same period, the more broadly based S&P 500 Index has dropped 7.7 per cent to 1,265.42, and the tech stock laden Nasdaq Composite Index has shed 8.9 per cent, closing Wednesday at 2,631.46.

Oil prices, which briefly topped $114 US a barrel in late April, dropped more than $4 Wednesday to close just above $95 in New York.

Many high-quality Canadian oil stocks have suffered even more severe declines, however, with Suncor, Nexen, Talisman, Canadian Natural Resources and Penn West all mired more than 20 below their 52-week highs.

So what’s an investor to do? Well, if you believe we’re entering another recession, what we’ve seen so far is just a warm-up act for what’s ahead.

If the worst-case scenario plays out, one can’t rule out the possibility of QE3 -yet another round of quantitative easing from the Federal Reserve, in a bid to prop up asset values and tame rising inflationary pressures.

But let’s think positive, shall we? If you believe the current downturn is just another pullback in an ongoing bull market, and if you’re lucky enough to hold cash, then get ready to go shopping. You could see some juicy buying opportunities ahead.

So how does one know when it’s time to dive in? Experienced investors tend to follow technical indicators -i.e., market "support levels" -at which buyers felt stocks were cheap previously.

"The most recent support level for the S&P 500 was the range surrounding the March 16th low of 1249-1266," says an article in Barron’s, the respected U.S. investment weekly.

"The current decline has already taken the S&P 500 to 1265, and most other major indexes into respective support zones. It is one technical reason why the market finally bounced earlier this week as some investors thought stocks were cheap again."

Alas, as Wednesday’s declines showed, that uptick Tuesday proved fleeting, and market indexes are plunging again.

"The next important support level is the November 2010 low of 1173. Not only can we see demand increase at that level, but it also represents roughly a 14-per-cent correction from the May peak," Barron’s says. "This is what many bulls would call a healthy pullback in a bull market."

Momentum is another key indicator of market direction. The key benchmark here is known as MACD -or the moving average convergence divergence.

"This week, many indexes reached support, but downside momentum was still strong," Barron’s notes. "In other words, the stage is not yet set for a rebound."

Patience, my friends. Patience.