Well it was bound to happen, says analyst Robert Pavlik from Banyan Partners. After six consecutive weekly gains the stock market finally saw its first major pull back totaling more than three percent. Yesterday Bank of America reported better than expected earnings while at the same time the company increased its reserves for possible losses associated with loans and credit card. It was the increase in loan loss reserves on which traders focused and used as an excuse to sell bank stocks and lock in recent gains. As the trading session progressed the selling pressure migrated from the financial sector into the broader market as fears of larger pull-back led traders to close out long positions and open new short positions in an attempt to profit from a further pull back in stock prices.
The question surrounding the market today is, Were Monday's losses the start of another bear market decline? We view yesterday's action as a normal short-term trading correction in what is a broader longer-term uptrend which is being supported by better than expected earnings, and early signs of economic stabilization.
Monday's sell-off is actually a good thing for the markets because it is these sell-offs that provide investors an opportunity and confidence to buy stocks that they might not have otherwise done during a rising market. Thus the buying on the dips help contribute to further gains.
From an intermediate perspective it appears as though the market has begun to consolidate between 825 to 875 on the S&P 500. This consolidation phase happened to coincide with the start of the Q1 earnings season. Investors have entered this earnings season somewhat worried that an earnings miss from a major corporation could place the rally that began on March 6 in jeopardy. Our firm believes that flagging consumer sentiment contributed to the sluggish movement of stocks during the first quarter. However because market conditions have improved and the rate of descent in the economy has slowed, we caution investors from trying to ascertain the future direction of the market based on the results of the past three months. Our firm has contended, since the beginning of this year, that the economy will first experience a transition from a steady rate of decline to that of stabilization followed by a shift into the early stages of recovery. As the seeds of stabilization become more apparent the capital markets will respond positively in anticipation of a return to positive GDP.
As our optimism continues to increase our resolve is further supported by the large amount of uninvested cash that we believe will return to the stock market as the economy continues to expand. We continue to increase our exposure to equities and we maintain our overweighting on Basic Materials, Industrials, and Technology. Additionally we have been increasing our exposure to: Financials and the Consumer Discretionary sectors while conversely reducing our exposure to Consumer Staples and HealthCare.
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