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Are These Market Indicators a Signal to Run?

By Michael Lewis - Apr 4, 2013 at 12:33PM

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Four bearish metrics have investors scurrying off. Should you join in or stay cool?

The S&P 500 (^GSPC 0.01%) has wasted no time in 2013, climbing more than 6% through the first three months of the year on top of 2012's 12% gain. It seems that once again, investors have taken to equities as their preferred form of investment. It makes sense, given the sky-high prices and meager returns in fixed-income markets and a continued (if tepid) economic recovery. But contrarian indicators are starting to fly, just as they did in 2010 when most were too scared to wade back into the market. Do these bearish market signals mean you should take your finger off the trigger, or is there more room to run?

Four horsemen
ADP recently released its March jobs report, and it fell short of consensus expectations. As MarketWatch reported, the private sector gained 158,000 jobs, while the consumer confidence index dropped to 59.7 from 68 just a month earlier. Jobless claims actually lifted this past month to 350,000 -- a reversal from the trend of recent months. GDP is predicted to drop to 2.2% growth this quarter from 2.8% in the beginning of the year.

These numbers alone were enough to scare off investors, as evidenced by Wednesday's 100-point-plus sell-off in the Dow Jones Industrial Average (^DJI 0.03%). But should you be worried about a coming correction?

Not exactly
Keeping an eye on macroeconomic trends is wise, and it makes you sound intelligent at cocktail parties, but don't let it influence your portfolio too much.

A stock picker need not worry about these relatively short-term, all-encompassing facts and figures. To help put it into context, just translate all of this jargon into a real-life scenario.

Let's say you own a Laundromat on a busy corner. Hopefully, you bought the business at a good price and it's in a smart location with consistent traffic. Because you had the good sense to buy into a business with steady demand, it doesn't really matter at all if the consumer confidence index takes a dive. Tomorrow, there will still be people who need to do their laundry and fight with the person next to them for the last oversize-load machine.

Will the market value (not always an accurate indicator) of your business drop tomorrow? Maybe. But Laundromat owners do not buy and sell their businesses on a day-to-day basis. You bought the business because you liked its cash flow and addressable market and growth prospects. Who cares what someone wants to buy it for tomorrow? You have the luxury of saying, "No, thanks" and waiting for the day that someone comes through the door with a check that gives you your desired profit. In the meantime, you keep earning those laundry dollars and let the rest of the market freak out whenever an economic indicator gets out of order.

Keep calm and Fool on
There are an endless number of pundits who will forever call for market triumphs and failures. You don't have to (and probably shouldn't) listen to any of them -- whether they support your portfolio or not. Keep your focus on your companies, and you will save yourself stress and, let's hope, money.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,261.90 (0.03%) $8.77
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,901.36 (0.01%) $0.57

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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