Stocks were clobbered on Monday as renewed worries about eurozone politics and credit weighed on global risk sentiment. This all came at a moment when stocks were heavily overbought, so once investors decided that they wanted to worry about the political stability of Spain, it was really a matter of dry kindling meeting a match.
I have a feeling this will sound funny in a few days or weeks. We have been through this so many times before and discovered that, in the end, the world’s investors have a very low tolerance for caring about European countries’ internal political spats — even if this one is a corruption scandal that has led for calls for the resignation of Spain’s prime minister.
The good news? Well the market absolutely, positively needed a pullback — and it will most likely get more than just what transpired yesterday. Now that the 1,500 level of the S&P 500 has been breached to the downside, bears will take aim at the 1,440 to 1,465 area. That would likely be enough of a pause to refresh bulls and set up the final assault on the highs in the 1,570 area. A momentary scare in the eurozone and Middle East is exactly the kind of scary (but ultimately inconsequential) spur for a setback of this magnitude.
Before getting too worried, take a moment to consider the magnitude of what brought the Dow to the 14,000 level in the first place last week. The advance that began on March 6, 2009 at 3:30 p.m. ET has persisted for 1,426 days. According to Bespoke Investment Group data, it’s now the seventh strongest and eighth longest of all time. If the S&P 500 gets to its prior 1,567 high without a 20% pullback, it will also be the fifth strongest bull market of all time.
This data tells us two things:
- First, there is nothing unusual about the current advance. Seven other bull markets in the past century started at lows where conditions seemed dire, and proceeded to rise a lot more than we have seen in the current market. There is no such thing as a “perfect” bull market, or perfect conditions. There must always be fear, uncertainty and doubt, or stocks would shoot to full value immediately.
- Second, the ceiling for further advance is still most likely higher in price and farther away in time. The bull market that started after the 1987 crash lasted 4,494 days until March 24, 2000, or 3.1 times longer than the current bull market. Two other bull cycles were almost twice as long: June 13, 1949 to Aug. 2, 1956 and Oct. 3, 1974 to Nov. 28, 1980. In terms of price, two of the other bull markets produced twice the gains of the current cycle, and one produced gains that were four times larger.
If stocks were expensive, the economy was booming, inflation was rampant, central banks were raising rates and the mood was truly ebullient, we wouldn’t be talking about this kind of upside. But none of those are true. Stocks are cheap — Apple (NASDAQ:AAPL) is at 8.8 times forward earnings, General Electric (NYSE:GE) is 12x, Bank of America (NYSE:BAC) is 9x, Merck (NYSE:MRK) is 11x and Hewlett Packard (NYSE:HPQ) is 5x; GDP growth is a paltry 2%, max; inflation is tame due to the slack labor market; central banks are still pumping like crazy; and while the mood has perked up recently, with fund flows higher, it is nowhere near overly ebullient.
In summary, stocks are due for a correction and they’re getting one. It could be one that wipes out half or more of the January gains, but it’s unlikely to go much beyond that. After a pause, expect bulls to come back refreshed, tanned and relaxed and looking for the same type of stocks that worked in January: health care, industrials, staples and emerging markets.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
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