What Does All the Profit Taking Mean?

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There is no doubt that both the analyst community and many economists were way too optimistic about the first quarter. I originally thought that analysts may have set the bar too low for companies, given the strong U.S. dollar and the amount of analyst earnings revisions we were seeing.

Stock Market VolatilityI openly admit that I like positive analyst earnings revisions, because they typically precede positive earnings surprises. However, this time around, the analyst community ended up setting the bar too high.

And, unfortunately, economists made the same mistake for the U.S. economy. Lackluster business investment, slower-than-expected consumer spending, lower-than-expected construction spending and a cautious energy sector all contributed to suppressing first-quarter GDP growth.

The most-recent estimate for first-quarter GDP growth was a paltry 0.2% pace, missing economists’ estimate for 1% — and if you exclude rising inventories (which contributed 0.7%), first-quarter GDP growth actually contracted at a 0.5% pace.

With the trade deficit now at its highest level in more than six years, virtually all economists expect that first-quarter GDP will be revised down to actually show that the U.S. economy contracted.

So, in the wake of weaker-than-expected earnings results and disappointing GDP growth, it’s no wonder that the stock market was in a profit-taking mood in April. Many stocks hit “air pockets” and abruptly adjusted in price.

The reality is that traders love to take profits in strong stocks, and that’s why we saw the April profit taking start with the semiconductor industry. It then spread to healthcare, biotech, pharmaceuticals and even high-yielding dividend stocks.

All were subjected to sharp and sudden selloffs. However, the recent rotational correction happened on light trading volume, and as long as trading volume remains light, there is no reason to panic.

Plus, once this recent rotational correction finishes, we should see these stocks rebound impressively. The fact of the matter is that good stocks typically rebound like fresh tennis balls, while bad stocks fall like rocks.

We’re actually already seeing this start to happen; semiconductor stocks have announced solid first-quarter results, and their stocks are bouncing back. So, I expect other stocks will follow soon.

Naturally, I am expecting that stocks characterized by strong forecasted earnings and sales will also rebound impressively in the upcoming weeks and months.  Looking ahead, future sales and earnings growth is decelerating across the board. The S&P 500 is now characterized by flat forecasted sales and earnings growth for the remainder of 2015.

Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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