This Is Still Just a Much-Needed Correction

by Sam Collins | February 6, 2014 2:10 am

The U.S. stock market sputtered again Wednesday as investors and traders stepped away following a shaky start to February. And global stocks have declined as a result of slow economic growth and currency risk.

ADP reported that 175,000 private sector jobs were created in January, which fell short of the 193,000 projected. As a result, Friday’s government employment number is expected to be lower than the consensus forecast of 189,000 jobs.

In corporate news, Merck (MRK[1]) rose despite missing earnings estimate, saying that it was ramping up development of an experimental drug. Dow component 3M (MMM[2]) gained after announcing a $12 billion stock buyback program, and Aflac (AFL[3]) rose after it beat estimates and reported that its 2014 earnings would benefit from its share buyback plan.

At Wednesday’s close, the Dow Jones Industrial Average fell 5 points to 15,440, the S&P 500 dropped 4 points to 1,752, and the Nasdaq lost 20 points at 4,012. The NYSE traded total volume of 3.9 billion shares and the Nasdaq crossed 2 billion. Decliners outpaced advancers on the Big Board by 1.4-to-1, and on the Nasdaq, decliners were ahead by 2.2-to-1.

VIX Chart
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The VIX is now close to 20, accelerating from a low of under 12 in just two and a half weeks. This is telling us that that stock market is oversold and due for a rally.

NYSE Chart
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Chart Key[4]

Despite the failure to close higher, the NYSE Composite is holding within its bull channel. This index, which contains all of the stocks traded on the New York Stock Exchange, represents a broad section of U.S. stocks along with many foreign stocks.

Like the other major averages, the Composite has fallen sharply from its December high. But it is holding within its bull channel, and its MACD is grossly oversold. On Monday, its Relative Strength Index (RSI) hit the lowest number since the market low on Nov. 12, 2012.

Conclusion: All of our internal indicators, along with the VIX, are showing that the stock market is grossly oversold. But the near- and intermediate-term price action is still not indicating a let up in a short/intermediate downtrend.

The public is in a panic as indicated by recent sentiment numbers provided by AAII, advisers and analysts. And yet, at the end of December, almost every commentator was bemoaning the overbought indicators and opining that what was needed was a solid correction to get things back in balance.

With the major indices down between 5% and 6%, we have experienced a mild decline. And yet those same commentators are now howling that the market may turn even lower and that the major trend is in jeopardy of turning bearish.

What we are experiencing is nothing more than a normal pullback following a dramatic thrust to new highs in December. Yes, the market could go lower, but prices of some highly touted stocks reached very high P/E multiples and were in need of a reversion to what statisticians call “the norm.”

Smart long-term investors will be entering some of the most beaten-down stocks, especially those that flew highest in November and December (like 3D printing stocks, which are in a correction). It is a bit late to put new money on the shorts. Instead it is time to be patient and use a rifle approach to grab those stocks with the greatest potential at bargain prices.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. MRK:
  2. MMM:
  3. AFL:
  4. [Image]:
  5. click here:
  6. click here:

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