When the market corrects, the temptation to buy stocks can be strong for investors armed with cash. Who doesn't like buying something at a discount?
Many strategists are recommending investors take advantage of recent declines, which have sent the S&P 500 falling 13.7 per cent from its recent high and Canada's S&P/TSX composite index falling 6.3 per cent, on the premise that the economic recovery remains on track.
But not everyone is feeling opportunistic. Some market watchers are concerned that the turbulence that began in late April has some room to run, making buying on the dips a dangerous practice.
John Hussman, president of Hussman Investment Trust and author of one of the most compelling weekly market commentaries, believes that recent setbacks haven't sent stocks to attractive levels. Instead, they have merely fallen to levels of "clear overvaluation" from "strenuous overvaluation."
"From my perspective, we remain in the eye of the hurricane here, which we have expected for some time," he said. "Suffice it to say we remain very cautious."
Part of his concern stems from the market's reaction to the U.S. Labour Department's payrolls report for May. The economy generated just 41,000 private sector jobs last month - a shocker that sent the Dow Jones industrial average hurtling 323 points on Friday.
Mr. Hussman pointed out that the four-week moving average of weekly jobless claims - at about 450,000 - is consistent with monthly payroll losses, not gains.
"The fact that we got a positive private sector number at all was something of a gift," he said. "As the stock market sold lower on the news, it was fascinating to hear several analysts saying palliatives to the effect of, 'Well, some amount of month-to-month variation should be expected. Nobody expected the economy to have a 'V' shaped recovery.'
"Excuse me, but that's precisely what the market has priced in," Mr. Hussman said. "And that's the problem."
He also believes that markets are missing a far bigger issue than the debt crisis in Greece, the plunging value of the euro and the recent concerns about a potential debt default in Hungary.
"The fundamental problem is that we have not, as a global economy, accepted the word 'restructuring' into our dialogue," he said. "Instead, we have allowed our policy makers to borrow and print extraordinarily large Band-Aids to temporarily cover an open wound that will not heal until we close the gap."
In other words, indebted governments have issued more bonds than they can handle, and the only solution is for governments to restructure those debts.
Tobias Levkovich, U.S. equity strategist at Citigroup, also remains cautious, with a year-end target on the S&P 500 of 1,175 - or nearly 4 per cent below its high in April.
He addressed the issue of whether the indiscriminant sell-off has created so-called "baby with the bathwater" buying opportunities, specifically among U.S. materials stocks (think miners and chemical producers) that have fallen 18.3 per cent from their highs.
His conclusion? No way.
"Given the risk to earnings, unattractive valuation, dollar strength and sliding fundamental indicators, it would seem that trying to 'buy the dip' in the commodity stock spectrum does not make sense at this juncture," Mr. Levkovich said in a note.