Fear Rips Through Market As S&P Drops 6.4%!

This was truly a tough week in the market, the worst we have since in quite some time. Investor fear ripped through trading as the broad market fell 6.4% for the week. The strong market gains YTD have now evaporated. That is a big turnaround in just two short weeks. What is driving the market? The company line is concern over European fiscal conditions, most notably Greece. That is believed to be the most significant factor on why volatility rose so sharply last week on heavy trading volumes. We wrote last week that this was just market noise in light of all the positive domestic developments. Unfortunately, nervous investors and technical trading are turning what should be noise into something much more feared. As volatility rises, so do selling pressures, and the trend feeds the fear brigade the sustenance needed to escalate losses. All of a sudden what should be noise becomes a fully blown correction. Technical trading does not help matters. In fact, on Thursday, a “fat finger” was blamed for a mammoth 1000 point drop in the Dow over just 20 short minutes. Reports were that a trader inadvertently entered a sell order for 1 billion shares instead of a million. This event clearly spooked investors, something that I have never experienced before. We mentioned last week the market needed a pullback and we certainly got that and more. Despite the fears, we look at the recent pullback as a buying opportunity and fully expect the market to end the year at higher levels than where we sit today. Now is not the time to sell positions as the market could bounce upward over the next few weeks as the fear eases over the European debt situation. There is also the overhang of potential Wall Street regulation, but that will likely take Washington much longer to figure out. The bigger picture to keep in view is corporate earnings, GDP growth, consumer confidence, and low interest rates. The trend for each of these factors is positive and far outweighs any potential long term impact over debt concerns in Europe. Even the US jobs picture is showing clear signs of improving as upwardly revised increases have been reported for the past four months. It is difficult to gauge and predict the ebb and flow of investor fear, but at some point these fears will subside and the stock market will resume its advance. Now is the time to be a buyer and not a seller!

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? Just two stocks remain buys from our Breakout list published last week. Rosetta Stone (RST, Software) and Amerigroup (AGP, Healthcare Facilities) performed relatively well despite the market meltdown last week. Both lost ground, but lost much less than the overall market. We had been watching OneBeacon Insurance Group, but recently dropped that from our list. We introduced this company to subscribers the prior week but cautioned investors to wait on buying until after quarterly earnings were released. That was a good call as their earnings report was a disappointment and that, along with the market chaos caused a big drop in their stock. We added three new stocks to our watch list including Providence SVC Corp (PRSC, Personal Services), Sturm Ruger (RGR, Recreational Products), and Industrial SVCS (IDSA, Waste Management). Providence provides government sponsored social services and transportation services to health care providers. Providence just reported record first quarter earnings and appears positioned for strong future growth. Valuation remains attractive and the stock price has held up well over the past two weeks despite the meltdown. Sturm Ruger is engaged the design, manufacture, and sale of firearms. The company works has a production backlog, exceptional operating margins and carries a Return on Equity that is one of the highest in the industry. The stock price has had a good run over the past few months, but we think there is more room to run in light of a PE just over 10. Industrial SVCS is the last new addition to our breakout list and operates in recycling and waste services. IDSA is due to report quarterly earnings May 10, so waiting until after those reports is most prudent. IDSA will get the green light to buy if it can exceed earnings estimates.

Last week was an extremely volatile week which saw the largest weekly drop in two years. Investors are nervous and technical trading has put a lot of selling pressure on the market. We cannot predict when the market will rebound over the short term, no one can. However, we do believe that the long term trend is positive as the economic and business fundamentals continue to improve. The market will recover from the meltdown last week once investors realize current fears are overblown. Now is the time for investors to be patient and resist the urge to sell holdings. It is more prudent for investors to ride out the current volatility and reevaluate once the market begins to stabilize. We actually think now is a good time to buy as the overall market is now back to where it started the year. Investors that missed out on the first quarter run can now get into the game on equal footing. We are not surprised at the recent pullback as the market had been experiencing a strong run, but were surprised at the sharpness of the declines. Nonetheless, we do expect the market to bounce back significantly since in our view the market became oversold. The key to successful investment is to stay invested for the long haul and by doing that investors will be in the game to participate in the next market recovery.