Stocks are getting pummeled after weekly jobless claims came-in higher than expected at 429,000. Obviously that isn’t enough to cause 170 point drop in the Dow. The real issue is that stocks are still seriously overvalued because economists and analysts have brainwashed investors into believing that the economy was going to recover at a much faster pace than we are experiencing. The realization that economic growth will be more like 1.5% to 2% this year, and probably won’t be much better in 2012 (I expect 2% to maybe 2.5% in 2012), is causing investors to reassess their expectations for stock valuations.
Each time stocks have a “bad” day like today (now down 180 points), some traders/speculators and some investors, falsely believing that stocks are “cheap” jump in with new cash and drive stocks back up. We have seen this happen over and over again over the past several months. Again, this reaction to any selling in stocks in based on the false belief that stocks are properly valued, which in turn is based on those overly optimistic analyst and economist predictions. Once the investing public realizes the reality that growth will be much slower, stocks will have to adjust down to reflect slower growth. I believe that stocks will over-correct, offering a good buying opportunity. I will likely put more cash to work at around 1,250, but I could see stocks moving below that level, so I will still reserve some cash for lower levels.