Volatility Spikes Again, Official Correction Is Registered

Another volatile week as selling pressure drove the market significantly lower to a weekly loss of 4.2%. Volatility (VIX Index) rose sharply hitting highs over 45, levels not seen in quite some time. The stock market has officially fallen more than 10% from highs hit in April, a measure that is widely considered an official correction. The question on the minds of many is whether this is a correction in a bull market or just the resurgence of a long running bear market. Let’s look at the fundamental drivers for clues to that question. The near term panic is over the debt concerns in Europe and the drop in the Euro. There are also concerns at home over pending financial regulation that could adversely affect the financial markets. Near term, we think the market will get answers that address the uncertainty over Europe and financial regulation. Progress has already been made in government efforts to address financial legislation with the goal to resolve by July 4. Clarity over the slowdown in Europe should become more clear over time as information is absorbed and foreign governments have time to respond. Slower growth in Europe may weigh on overall world growth, but we do not expect Europe to restrict the US market advance. Likewise, we expect the uncertainty over financial regulation to be resolved soon and frankly do not expect that to dampen market back either. Instead, the fundamentals that we think will drive the market long term are corporate earnings, consumer spending, consumer confidence, and jobs. We have started to show signs of improvements across all of these fundamentals, and while improvement may be slow we are trending in the right direction. For example, the first quarter reporting season is nearly over and this week 25 out of 26 Fortune 500 companies reported better than expected earnings. That is a clear sign corporate performance has turned the corner. Consumer spending and consumer confidence has also shown improvement. Jobs growth continues to be sticky and as a lagging indicator will be slower to respond, but it appears the worst may be over. All in all, these fundamentals suggest that the 10% loss just experienced is indeed a correction and not a return to a bear market. Corrections in bull markets happen frequently and more often than not the market resumes its advance with even more fervor. We think the market has the strength to end the year with positive gains at least in the 10%-15% range. That makes this correction an excellent time to buy stocks!

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

What Stock Tips do we have? For this week, we have three stocks on our Breakout list. Amerigroup (AGP, Healthcare Facilities) and Industrial SVCS (IDSA, Waste Management) remain on our list from the prior week. Momentum on Amerigroup stock has not moved much over the past 8-10 weeks. That is a bit of concern and we would look for a strong move up before investing. On the other hand, Industrial SVCS stock has move sharply down over the past few weeks, much more than overall market. We think this stock has excellent fundamentals and recently released exceptional earnings. The stock has simply become way oversold and short interest speculation is still a bit high. We like Industrial SVCS prospects despite the recent correction and plan to buy as we expect the stock to bounce sharply over coming months. We added one new stock to our buy list, Delta Apparel (DLA, Apparel/Accessories). We have traded DLA successfully before, and the stock once again shows on our Momentum and Value stock screen. The stock has weathered the recent meltdown well and has sustained a long uptrend since October of last year. The stock price rally may be starting to get a bit long in the tooth, but investors could still benefit from momentum over the short term. We bought Providence SVC Corp (PRSC) and IMPAX Laboratories last week so we removed those from our buy list. However, investors should still consider both stocks buying opportunities. We dropped Rosetta Stone given concerns over pending litigation costs in its suit with Google, along with the fact that the stock price has not moved over the past two months. We may add this one back once there is more clarity over this litigation and earnings potential. The market has been showing very high levels of volatility and that makes this a difficult time to invest. However, with the official correction measured last week, now is an excellent time to buy long stock positions. The market could still drift lower, but it is fruitless to wait and try to buy at that elusive bottom. Buy now when stocks are low, as the recovery could also be swift. We still expect the market to finish well into positive territory by the end of the year.

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