Finding the Best Buying Opportunities in Volatile Markets

Mr. Market spoke last week….

Unfortunately, no one could understand a word he was saying. Like a back-alley drunk, Mr. Market was mumbling about so much of everything that he wasn’t saying anything at all.

Since July 26, Mr. Market has obliterated $6.8 trillion of global market capitalization. That’s fairly decisive. But last week, he seemed to be having second thoughts…and third thoughts.

“The swings in US equities [last] week were unprecedented in the history of the American stock market,” Bloomberg News reported. “The S&P plunged 6.7 percent on August 8, its biggest slump since December 2008, in the first trading session after the US was stripped of its AAA credit rating by S&P. The index rebounded 4.7 percent the next day as the Federal Reserve said it would leave its benchmark interest rate at a record low through at least through the middle of 2013. The gauge then fell 4.4 percent on August 10 and rebounded 4.6 percent on [August 11]. Never before has the index reversed moves that large each day over four sessions, [according to Birinyi Associates].”

For the moment, investors who snapped up stocks on the lows of last Tuesday or Wednesday are feeling like geniuses…and maybe they are. But tomorrow they may feel like morons.

Last week’s buying opportunity may not be as compelling as next week’s buying opportunity. In fact, we’d be surprised if US stocks did not make lower lows during the next few weeks. Big problems remain…and big solutions remain MIA.

The leaders of the European Union have next-to-no idea how to solve their enormous fiscal crisis. Likewise, the leaders of the US have next-to-no idea how to solve America’s life-threatening fiscal crisis. Pathetic is the word that comes to mind.

Not surprisingly, consumer sentiment is plummeting. The University of Michigan’s consumer sentiment index tumbled from 63.7 in July to 54.9 this month.

In the midst of the doom and gloom, however, opportunities emerge. Last week’s selloff certainly punished some stocks that did not deserve punishment. The selloff, in other words, created a buying opportunity for certain stocks. Volatile markets tend to throw the babies out with the bathwater.

Eric Fry
for The Daily Reckoning