Don’t start the bargain buying just yet

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Talk about your roller-coaster rides. Last week was a classic example of why investors get so nervous whenever October comes around. Triple-digit swings every day can be hard on the tummy.

It started badly. While we were blissfully eating Thanksgiving turkey on Monday, the Dow plunged 223 points. That set the stage for the TSX to play catch-up on Tuesday and it responded by dropping 191 points to move into official correction territory. By the close that day, the Composite stood at 14,036.68, down 10.5 per cent from the all-time high of 15,685.13, which was reached in intra-day trading just six weeks before on Sept. 3.

That wasn't the end of it. On Wednesday, the TSX lost another 167 points and it appeared the rout was on. At that stage, it was down more than 1,800 points or 11.6 per cent from the Sept. 3 peak.

The major U.S. indexes haven't done as badly. Although the small-cap Russell 2000 is in correction mode, the Dow, S&P 500, and Nasdaq haven't hit the 10 per cent number yet. We've fared worse because such a large percentage of the S&P/TSX Composite is in resource stocks. October is barely half over and already the metals and mining sector has lost 19.1 per cent, energy stocks have given back 15.1 per cent, and materials are off 11.3 per cent for the month.

Then, just when it appeared that the doomsayers had settled in for a long stay, the TSX turned on a dime. On Thursday it rallied 183 points, recovering all of Wednesday's losses plus a bit. The resurgence continued on Friday with another 175-point advance. By the time it was all over, the TSX was flat for the week and investors were mopping their brows.

Now the question is: What next? It's been three years since the last correction of 10 per cent+ so the pullback was overdue. But have we reached the bottom for this round or is there more downside left?

There is certainly enough angst out there to rekindle the market decline. Europe appears to be heading back into recession, with the possibility of deflation exacerbating the problem and the European Central Bank virtually out of ammunition. The sinking price of oil has many investors and analysts worried since low prices have historically portended a global economic slowdown. The reports from China continue to be sombre. Ebola has suddenly emerged as a threat to North America.

My feeling is that the end-of-the-week rally is only temporary. Bargain hunters took advantage of some great buys but the fundamental problems are unchanged. With two weeks still to go in October, my advice is to be cautious about adding to positions immediately. In fact, some people may want to use the rebound to do some selective selling and lock in gains.

Another broad round of selling, should it materialize, would allow markets to consolidate and set the stage for a new up leg starting later this year or early in 2015. But as I've said many times, nothing is certain, most especially the timing. If there are some stocks you'd like to own, set a target entry price and keep watch on them. If they hit your target, gradually begin taking positions – say 50 per cent at the outset, adding more on any further weakness.

And try to dial down concerns over triple-digit fluctuations. As we saw last week, everything usually evens out.