In last week’s column “Is the Dip Done” I ruminated on whether the S&P 500 Index’s correction was over. There were conflicting signs in the markets and I decided to wait a week before jumping on the rally band wagon. I’m glad I did since the market’s action this week makes me believe there is still some further downside ahead.
That does not make me a bear, just short term cautious, and I still think that a further decline to the 1,015-1,030 range of the S&P presents readers with a buying opportunity. Once we reach that level, I think the markets rally to a new yearly high around the 1,200 level.
For long-term investors, these mini-corrections should not matter at all, unless you have some cash to invest. For example, I have had the good fortune of closing several new clients over the last two months. The short-term market top at 1,150 on the S&P and this subsequent correction has allowed me to sell some stinkers in their portfolios and hold the cash on the sidelines. If the market declines from here, I will begin to deploy that cash in sectors I believe will lead the markets higher into the spring.
The fundamentals of the economy are improving but that does not mean investors can expect a continual stream of upbeat numbers every week. Recovery, as I have often said, is a process with positive numbers (like this week’s revised fourth quarter GDP growth of 5.9%) followed by disappointment, such as home sales in January which fell 7.2%. In any given week, we will see these kinds of contradictions until the recovery kicks into over drive. Right now we are still changing gears and you should expect some starts and stops during that process.
At the company level, over seventy percent of earnings reports beat estimates but those results were discounted going into earnings season. It will be several weeks before traders begin to focus on first quarter earnings. In the meantime, there are enough unknowns out there (Greece, the Euro, China, the direction of interest rates, etc.) to maintain downside pressure on the averages. It appears that we are in a trading range with the top of that range around 1,112 on the S&P 500 and, so far, the bottom around 1050 with a bias to move lower.
This digestion period, in my opinion, will be good for stocks. It will take some of the froth out of equities, allow investors and traders alike to regroup and square valuations with fundamentals. It will also allow future economic data to catch up to the lofty level of the market.