Most investors were expecting a correction after the enormous surge in 2013, but evidence from Europe indicates that the downturn could be short and may have already happened with this week's blip. Still, as MoneyShow's Tom Aspray writes, this is not the time for aggressive buying, although several stocks he recommends below have fallen to acceptable buy levels.
The US stock market had a sharp two-day slide last week, and most of the major averages made their lows Thursday afternoon before turning higher into the close.
The impressive rally on Friday pushed the Dow Industrials into positive territory for the week, while the other averages finished a bit lower. Friday's close may indicate that the correction is already over.
A correction has been expected for several weeks, as up through February 15, the S&P 500 had closed higher for seven consecutive weeks. While US analysts were fixated on whether the US market would correct or not, European markets were already correcting.
The German Dax Index has been leading the S&P 500 since the June 2012 lows, up 27.8% since then against a 17.2% gain in the S&P 500. Its better relative strength was evident last November, as I discussed in Should You Invest Overseas?
The correction in the Dax from the September highs was much less severe, as it held above the 38.2% Fibonacci retracement support from the June lows. The chart of the Spyder Trust (SPY) shows that it was much weaker, briefly violating the 61.8% support from June's lows.
The Dax index topped on January 25 at 7,865, and at Thursday's low of 7,561 was down 3.8% from its highs. The daily chart also shows a fairly normal corrective pattern that has already taken the Index close to support from the September highs at 7,488. A close in the Dax above last week's high of 7,784 should signal that the correction is over.
SPY has corresponding support now at $148.44, which is about 1% below Thursday's low. Given that the Dax topped out 12 days ahead of SPY, we may see more choppy-to-downward action before its correction is over. This would be more like the first scenario I outlined last Thursday in 2 Scenarios for Market's Correction.
The focus will be on the Eurozone this week, with the Italian election this weekend. Things are so bad that a comic could come in third, as he has struck a chord with the Italian public's disillusion with politicians.
The report from the ECB that Italian bonds make up over half of its holdings from the bond-buying program is also a concern. Overall, the outlook for the Eurozone economies is negative: EU economists are forecasting a 0.3% contraction in its economy, which means a reduction in business and consumer spending and even higher unemployment.
The outlook for Germany is much more positive. The report on the Ifo business-climate index, which showed a climb to 107.4 this month from 104.3 in January, helped boost US stocks early Friday. This index is based on a survey of 7,000 executives, and they are much more positive on the economy than most experts expected. Positive growth is expected in Germany for 2013, with 2% growth in 2014.
The chart shows that this survey, along with two other measures of their economy, turned up sharply in late 2012. All are looking quite positive.
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