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By Christine Benz | 08-09-2011 09:50 AM

Rekenthaler: Good Time to Buy on the Dip

The issues surrounding the economy are very real, but investors can still find value in the market today, says Morningstar's John Rekenthaler.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Stocks have sold off sharply over the past few weeks. Here to offer his insights on what the implications are for investors is John Rekenthaler. He is vice president of research for Morningstar.

John, thanks so much for being here.

John Rekenthaler: My pleasure, I'd say good morning, but I don't know if it's good morning yet.

Benz: No. Well, it is so far, but it may not stay that way.

Rekenthaler: That's correct.

Benz: So, John, we've had this steep sell off in stocks. Some of the initial headlines were that it was driven by the S&P downgrade, it doesn't sound like you think so though. What do you think is driving?

Rekenthaler: Obviously, that added to the uncertainty. But let's face it. A downgrade of a sovereign country is something that's based on very long-term information. There is not a lot of new information in there. There wasn't much in what S&P has done. Really, the new information that's been coming out is the continued crack-up in Europe, the split among the strong euro countries and the weak euro countries. That's worrisome. That's uncharted territory. Nobody has seen an attempted currency union like this, and really policymakers don't know what to do. And that's where the true uncertainty lies. Obviously the downgrade in the United States did not help.

Benz: As well as concerns over growth here in the U.S. too

Rekenthaler: That's correct.

Benz: That's we kind of had a drip-drop of news last week about growth not being what many had hoped it would be.

Rekenthaler: Yeah, by my estimation, we'd have maybe one third of this drop if it were just about the U.S. between the growth concerns and the downgrade. The remaining two thirds is related to the really big European issues.

Benz: So, we had a conversation yesterday with Steve Leuthold, and it kind of struck fear into my heart, because he thought we would rally after the big sell-off, but he felt that it was just kind of a head fake and that it would be a true bear market that would continue. What's your take on a comment like that?

Rekenthaler: I'm ready to go partially that way. I do think a rally is probably in order. Whenever you get a downturn this steep, 6% Monday and 17% over the past three weeks or so, you tend to get margin calls and technical reasons why the market declines further than it should. Never mind panic, there are just technical reasons in the market why people who will rather leverage have to get out and it pushes price down further than they should.

So, in the short term I definitely think there is opportunity. I'm probably not suppose to say this at Morningstar, you know from a very kind of short-term trading perspective. Actually I am in the market a little bit today. I'm mostly a strategic investor, but I do a little bit of tactical and like to buy on dips and I think this is a good time to do so.

I do agree with Steve that we're going to see more bumps. I hope that we're not going to end up with these bumps too much below where we are now. It will be more bumping along at this level. But the Europe situation is far from resolved, and we have issues in the States, as well.

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