Remember school days? I used to welcome the (rare) opportunity to take a test over, because I generally thought I could do better the second time. It’s the same in the stock market. Last week’s burst of strength was a little too much, too soon. Now the market is hesitating, trying to decide whether to make a “secondary test” of the June lows.
Secondary tests can take a variety of forms. In the classic case, the indexes pull back to the previous low and break it by a marginal amount (say, 1%-3%). As I saw in August 2010, however, it’s also possible for some indexes to drop all the way back to the prior low while others remain above it.
Last year, for example, the Russell 2000 small-cap index undercut its July low in late August. The Dow and S&P 500 held above their July lows.
Whatever shape it may take, a secondary test would greatly strengthen the market by moving stocks out of the hands of short-term speculators and into the grip of value-oriented, longer-term investors. So I should accept, with gratitude, a moderate dip over the next couple of weeks. It will give me the chance to finish loading my shopping cart for a big late-summer rally, probably carrying through year-end.
What about last Friday’s lousy jobs report? The rumbles from Italy? These things have their significance, but they’re not big enough to derail the powerful earnings recovery under way among U.S. corporations.
According to Thomson Reuters, analysts are expecting S&P 500 companies to report a 7.3% profit gain for Q2 (versus the year-ago period), followed by 16.6% in Q3.
It’s hard to knock the market down for long when the corporate bottom line looks that good.