Is the correction of 2014 over?
From a technical perspective US Large Caps just missed entering correction territory last Wednesday (October 15) as stocks tested an intraday low of 1820.26 on the S&P 500 Index. From an intraday high of 2019.76 on September 19, the Index has fallen 9.83%. US Small Caps (Russell 2000 Index), which have struggled all summer, have also corrected falling from an intraday high of 1213.55 on July 1 to an intraday low of 1040.47 on October 15, a correction of 14.26%.
Is the correction of 2014 over?
Corporate earnings should provide a key piece to the puzzle with over 130 companies in the S&P 500 Index reporting this week. In just the last 24 hours we have seen the good (Apple, Halliburton, Illumina, Texas Instruments, VF Corporation, Kimberly-Clark, United Technologies and Verizon) and the bad (IBM, Coca-Cola and McDonalds). With 88 companies reporting thus far, the S&P 500 is on track to post earnings growth of 5.1% in the third quarter from the same period in 2013, which exceeds the 4.5% rise that analysts expected before the start of earnings season.
The market has fallen in each of the last 4 weeks. Daily moves of 1% have become almost commonplace as in the first 14 trading days of October we have already seen 7 days in which the DJIA rose over 1% (+207, +278 and +262) or fell over 1% (-236, -269, -330 and -214). Volatility as measured by the CBOE Volatility Index (VIX), the market's fear gauge, rose to over 32.0 last week. Yesterday, the VIX fell 16% to close at 18.57, below its long-term average of 20. Since the testing of the intraday lows last Wednesday, some order and a new sense of calm has returned to the financial markets.
There are other head winds to a rising stock market here in the US. As the austerity versus spending battle continues across Europe, there is a reasonable probability that the eurozone will fall into its 3rd recession in 5 years. The ECB initiated its own QE-like program of asset-backed securities purchases in September, which program coupled with cuts in interest rates to record lows may help, at least in the short term. Today we learned that China posted a 7.3% year-over-year quarterly growth rate, which though faster than most estimates, was the lowest level since early 2009. Add to these worries Ebola, tensions in the Ukraine, Syria and Iraq and mid-term elections here in the US and the next few months should be very interesting.
