Dow Drops 376.36!

Yesterday, the DJIA had a major drop in value, as did all of the other exchanges. I generally like to use the S&P 500 as the base for reviewing market activity. Yesterday it was down the most of all the exchanges, with a 3.9% drop to 1071.59. What is interesting is that the S&P 500 has dropped from its peak, on April 23, about 12%. What does all of this mean? For the short run it likely means the markets will move up for the next 2 to 7 days as that is what generally happens after a 90+% down day for stocks. Because the volume yesterday on the NYSE was 8.5 billion and the market moved down dramatically it means there was an ample supply of sellers who were likely doing some profit taking. It also means the market, at some future time, will test these lows. Given all of this data what does it mean long term? First of all, I believe this is the correction that I've been anticipating since the middle of March as the market was becoming overbought. I don't think this is a return to a Bear market. By mid April it was very apparent to anyone with an understanding of the market that it was overbought and a correction was coming sooner or later. The actual reason for the correction generally is meaningless in my opinion. In the early part of yesterday the drop was being blamed on the falling euro but the euro climbed from 1.21 to 1.25 so that was not it. Then it was the job data that came out showing new layoffs of over 470,000 instead of the 440,000 that was anticipated. Good story, but I don't think it holds long-term weight since the new job creation in April was 290,000 while what was anticipated was 180,000. Earnings data for corporations look good, consumer spending is OK and inflation does not seem to be an issue. The stock market is a leading indicator. This blip downward would indicate that the rosy picture that Wall Street saw in mid-March is being reevaluated. While the economy is improving it will take some time before it is sound again. In 1990, when we had a recession, the big reason was the failing productivity level in the US. It took the US five years to get back on top of worldwide productivity but it did what was necessary. The darkest cloud over the US currently is the government’s interference with the entrepreneurial spirit of this country. There are over 25 million small businesses in America and they are the heart of the economy. They have to have confidence in the economy, government spending and legislation in order to be willing to expand. Some of the new legislation intended for large corporations is falling on the small businesses both in regulation and more so in taxes proposed in the new tax bill. If this continues it could stall the economy and change the direction of the stock market. Ed Mallon

A Market Correction or a New Bear Market?

After the events of the past two years, it is understandable that the markets are so volatile. As I have indicated previously, the expectation of a market correction has been in the works since the latter part of March and most certainly after mid-April. My own expectation was for a brief correction of about 7%. When the markets get to a point where they are overbought, then a correction eventually comes. The question is when something will happen and what will trigger the change. In this case, the debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) was the catalyst worldwide to bring about a rapid descent. At the beginning of 2010, the S&P 500 opened at 1117 and by April 23rd it had reached 1217, up 100 points or almost 10%. Between April 24th and May 7th,the market went down to 1111 for a drop of about 8.7% and below the opening at the beginning of the year. The bond market acted in a similar fashion with interest rates decreasing until the scare from the PIIGS moved interest rates up and the value of bonds down. The action over the weekend to bolster the euro, with a commitment of $1 trillion, was a bold and needed move to keep the financial markets and economies of the world moving away from the recession. The impact worldwide has been dramatic and good. But how about the fundamentals? So far, 381 companies that make up the S&P 500 have reported earnings, and of these 77% have topped estimates. The S&P 500 index is trading at 13.5 times forecasts for earnings during the next four quarters while the long term average for this multiple is 16.4%. This would imply that there is still room for stock price growth. All of this was before Friday's meltdown. If the PIIGS situation remains stable, then it is likely the markets will resume their path higher. I am not complacent at this time because we in the US need to do something about our own Federal red ink! I am hopeful that we will see the light and move to reduce the deficit spending once the broad economy is out of the woods. For now, we continue on a positive path with very large job creation in April (I was thinking 200,000 but instead it was 290,000), inventories being replenished and businesses increasing spending. The signs for a recovery are looking good! Ed