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Stop Looking for a Correction and Buy

Stocks that took big hits have made stable bottoms and offer a great place to shop for value


On Friday, stocks continued the slow march higher as the S&P 500 set its fourth closing high in five days. It was another quiet trading session, though, following Thursday’s record low volume for the year. And the bump in volume was the result of semi-annual rebalancing.

The Commerce Department reported consumer spending unexpectedly fell 0.1% in April, and personal income rose 0.3% for the month, which was slightly less than forecast. Personal consumption, the Federal Reserve’s preferred gauge of inflation, rose 0.2%, meeting expectations. And the Reuters/University of Michigan’s consumer sentiment index for May showed a reading of 81.9, which was below projections.

At Friday’s close, the Dow Jones Industrial Average rose 18 points to 16,717, the S&P 500 gained 4 points at 1,924, and the Nasdaq fell 5 points to 4,243. The NYSE’s primary market traded 911 million shares with a total volume of 3.1 billion shares. The Nasdaq traded 1.8 billion shares. On the Big Board, there were slightly more advancers than decliners, but on the Nasdaq, advancers outpaced decliners by 1.6-to-1.

For the week, the Dow gained 0.7%, the S&P 500 rose 1.2%, and the Nasdaq was up 1.4%.

SPX Chart
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Our trusty 17-month S&P 500 chart added a new high in May, putting to rest thoughts of a meaningful pullback. Those who have been looking for a pullback given that the current index went to a premium over the past two bull markets, at 8.1% and 8.4%, have missed a major market advance of about 24%.

SPX Chart
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Chart Key

Here we see a clearly defined bull market channel with support at about 1,850 and resistance at about 1,975-plus. Note the recent successful test of support at the 50-day moving average and the minor resistance line at about 1,930. MACD is bullish, but some of our other internal indicators are slightly overbought.

RUT Chart
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The Russell 2000’s channel down that began in late March was reversed last week with the upside penetration of the 200-day moving average on Monday, followed by a gap up on Tuesday. But the advance ran into resistance at the 50-day moving average at 1,136.61, so the gap at 1,126 to 1,132 could close. Such an occurrence would be an ideal time for traders to take long positions in the index.

Conclusion: The stock market has rallied to new highs despite economic, political, and international tensions. And yet some are still waiting for the 10% correction.

As noted in my response to readers on Friday, “In a bull market all surprises are to the upside. And, don’t fight the Fed.” The current Fed policy is to go along with “easy money.”

When stocks tenaciously advance to new highs in the face of old news (economic data, political crises, etc.), then something else is going on that is not yet in the headlines but is nevertheless factored into stock prices. Thus, price trumps everything.

In an article titled “The Fear of Crashing,” Peter Lynch says, “Sure a 10% correction is coming. But what happens if we first rally 12% before we get the 10% correction? That means that the high prices you don’t want to pay today, will be the bargains that you can’t get after such a correction.”

And Raymond James’ Jeffrey Saut said, “The carnage beneath the guise of the S&P 500 near its highs has been intense with many of the high-beta stocks off 30%+.”

In other words, we’ve had our correction, and I believe that many of the stocks that took the big hits, especially in the high-tech and biotech arena, have made stable bottoms and offer a great place to shop for value. So let’s go shopping, but don’t forget to be prudent and enter stop-loss orders. No one can be 100% accurate.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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