No Time to Relax, More Significant Correction May Be in the Works

April 25th, 2013 by Abby Joseph
SPY: S&P 500 logo
SPY
S&P 500

Submitted by Abby Joseph as part of our contributors program.

By George Leong, B.Comm. for Profit Confidential

The stock market came off its worst week this year; but even given the minor correction, I don’t think we can relax enough to re-enter the market and buy, based on my stock analysis.

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I think there could be a more significant market correction down the road that could shave another five percent off the current levels.

Yet even so, the selling over the recent sessions have driven the key stock indices down to levels that are more realistic compared to levels at the end of the first quarter, according to my stock analysis.

Simply put, the previous rate of the advance was not sustainable.

My stock analysis shows that with April coming to an end, we could also be seeing the final leg of the current six-month bull cycle from November to April that has historically resulted in the best gains, according to the Stock Trader’s Almanac.

This doesn’t mean that stocks are not worth a look for the next six months. But if the historical cycles pan out, the best gains may have already been made, so it will come down to stock selection, according to my stock analysis.

Let’s take a look at the investment climate at this juncture.

What’s critical right now is the first-quarter earnings season. So far, with about 104 S&P 500 companies having reported, the results have more or less been in line with the previous quarters, with about 67.3% beating earnings-per-share (EPS) estimates, according to Thomson Financial.

Another 170 S&P 500 companies are reporting this week.

Of the 20% of the S&P 500 companies that have reported, the results have been largely mixed, but Wall Street expected this.

We saw encouraging results from several technology giants, including Google Inc. (NASDAQ/GOOG) and Microsoft Corporation (NASDAQ/MSFT). On the other hand, my stock analysis suggests that some key Dow stocks disappointed, including International Business Machines Corporation (NYSE/IBM), McDonalds Corporation (NYSE/MCD), General Electric Company (NYSE/GE), and Caterpillar Inc. (NYSE/CAT).

On the economic front, stocks and commodities got slammed on news that China may again be stalling; there could be an asset bubble forming, based on my stock analysis.

Goldman Sachs slashed China’s gross domestic product (GDP) to 7.8% for this year. The cut followed on the heels of a softer-than-expected first-quarter GDP growth recently reported.

As I said, the renewed slowing fears in China means a potential decline in demand for commodities, such as energy, silver, and copper used in industrial applications, and the precious metal gold used for jewelry and as a hedge against risk, based on my stock analysis.

Gold doesn’t look that good on the chart, despite rallying back above $1,400 an ounce, based on my technical analysis. Looking ahead, I’m not 100% convinced that gold will rally higher.

Oil prices are moving lower, which has resulted in lower gas prices at the pumps. The Organization of Petroleum Exporting Countries (OPEC) has come out and said it desires $100.00 a barrel as a lower limit for oil. In the past, the lower limit was $80.00 a barrel. The problem is that OPEC may cut its daily production quota. But given that the U.S. now imports less oil from OPEC, the effect on the West Texas Intermediate (WTI) oil price may be less, based on my stock analysis.

I would continue to advise caution. We are seeing some decent buying support following weakness, but my stock analysis indicates that it may be more of a red flag. Stocks will move lower, so be careful.