We view the recent market weakness as a normal consolidation of recent gains. This backing and filling process is normal in the context of a bull market. It will alleviate some excess and build a better foundation which will make the next leg higher sustainable.
Our belief is that this corrective action will be relatively short lived and shallow but, there is a much simpler reason to stay long stocks: improving fundamentals. So far this quarter corporate earnings announcements have averaged a top line (revenue) increase of 5% and 9.7% growth of earnings per share. GDP growth at 4% in the second quarter more than retraced the weakness in the first quarter. In time, the fundamentals always win. Companies have been able to leverage earnings per share and we expect improved economic growth that will create an increase in capital expenditure. We remain bullish and would recommend avoiding emotional decisions.
Interesting stat: Since 1990, when the VIX (Volatility Index) spikes more than 50 percent off its 63-day low, and the S&P 500 is above its 200-day moving average, as it is now, the S&P 500’s performance has been more than twice its average performance over the next one and two quarters.
According to Ari Wald, a well-regarded technician, the VIX is flashing a big “buy” sign. But it gets even better for the bulls. That’s because in the few instances that this phenomenon has happened since 1990 (S&P 500 above its 200-day moving average, VIX spikes of 50 percent or more), the forward average performance of the S&P 500 13 weeks, 26 weeks and 52 weeks out has been a respective 4.6 percent, 9.1 percent and 13 percent.