Why Superbad Tuesday Was a Blessing

03/07/2012 10:30 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Ugly as the market’s drubbing was, it might spare us greater pain down the road, writes MoneyShow.com senior editor Igor Greenwald.

Tuesday was anything but super on Wall Street.

The Dow lost 200 points for the first time since the day before Thanksgiving, when Europe’s banking system was on the verge of collapse. The S&P gapped 15 points lower at the open, and burrowed steadily lower from there: its ultimate 21-point margin of defeat was double the previous worst setback of 2012.

Things looked even uglier under the hood, as steady institutional sellers opted to dump a little bit of everything. On the New York Stock Exchange, declining issues outnumbered advancers by more than 10:1, while downside volume swamped advancing volume by 25:1—a landslide matched just five times all of last year. (And three times in 2010, and once in 2008, and before that not since the 1997 mini-crash. Welcome to the age of computer trading.)

So yeah, it was a lousy day. But one bad day is all we have so far, and the S&P 500 still finds itself above its flat 200-day moving average, as well as the rising 50-day moving average, which doesn’t come into play until 1,321. But first, the index would have to break beneath 1,341, the February low that held yesterday.

And if the S&P does take that plunge, it will have gone through a modest, routine correction. The steady grind higher over the last two months almost certainly attracted some weak hands in its later stages. The bandwagon is hardly full, but a keep-‘em-honest shakeout now might well preempt a bigger pile-up later.

Meanwhile, many of the retail investors who fled last year’s volatility into cash and bonds have been holding out for lower prices in equities. They would have chased a runaway market eventually, but letting them in at lower levels builds a broader and stronger base of support for a lasting advance.

I don’t want to gloss over the inescapable fact that growth overseas is slowing. Europe is in a recession, with unemployment at a euro-era high of 10.7% as a result of misguided austerity.

Chinese home prices in February suffered their heaviest decline in 19 months. The lowering of the country’s official growth target from the 8% of recent years to the new 7.5% bogey is an acknowledgement of the slowdown already under way.

It’s also a signal that China will no longer chase GDP growth at all costs. The government is serious about deflating the housing bubble, and perhaps even about its oft-stated goal of weaning the economy from its over-reliance on exports.

China’s transition poses dangers for its commodity suppliers, Brazil and Australia, each already struggling with an overvalued currency that has been hampering growth. Both countries have posted disappointing GDP numbers in the last 48 hours, though Brazil is likely to perk up this year thanks to government spending, and it would be a mistake to write Australia off just yet.

If the slowdown abroad persists, it has the potential to damage the earnings of US multinationals that have come to count on fast overseas growth. But the US economy could continue marching to a different beat, as employers, consumers, and home buyers step it up after several lean years. We don’t need fast growth abroad to sustain the overdue domestic expansion—just as long as the rest of the world doesn’t go to hell.

Apple’s (AAPL) iPad announcement today, the jobless claims data Thursday, and the monthly payroll numbers Friday could turn investors’ focus back toward growth opportunities in the US. And if they don’t, and stocks get a bit cheaper, so much the better from a buyer’s perspective.

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