Market Pullback A Healthy Correction, A Buyable Entry Point?

Stocks continued last week to seek some firmer footing, as prices found some support and volatility hit some resistance, and a flight to safety of global capital benefited long-term Treasury bonds -- the very assets that are supposed to be selling off in a secular “Great Rotation” into equities. There is a lot of investor fear that Fed tapering combined with tightening credit conditions in China (potentially bursting a perceived credit bubble) are already having a harsh impact on emerging markets and will eventually impact the developed markets, as well. Indeed, the iShares MSCI Emerging Markets (EEM) is down over -8.6% YTD.

However, I continue to see this pullback as a healthy correction creating a buyable entry point. In fact, if you follow the Super Bowl indicator, the Seahawks just made a resounding statement that the bulls will be back in 2014.

Many signs still point to global economic expansion and higher prices for U.S. and global equities, although I expect that the higher quality companies with sound business models and sustainable earnings growth should emerge as the leaders, ahead of the more speculative names that enjoyed so much attention last year.

Among the ten U.S. business sectors, only Utilities and Healthcare are positive for 2014, while Technology made a late-week attempt to gain some ground, with help from a well-received earnings report from Facebook (FB). Utilities are up +2.7% and Healthcare +1.5%. Energy was the worst performer during January, down -6.2% YTD, followed by Consumer Discretionary.

Certainly the fall in longer-term interest rates, with the 10-year Treasury now yielding 2.67% and the 30-year at 3.62%, is the opposite outcome to what everyone expected from Fed tapering. Much like we saw when S&P downgraded U.S. debt a few years ago and yields fell instead of rose, a flight to safety among global investors always pushes capital into U.S. Treasuries.

However, the biggest threat is not so much Fed tapering but an insidious move toward more and more government intervention in the marketplace in an effort to mitigate “income inequality,” broaden the public safety net, and generally protect public interest from the impacts of private and corporate initiatives. Witness President Obama’s promise to solve the nation’s problems “with or without Congress,” i.e., by executive order, which is basically the same as a third-world autocrat governing by decree.

All of this will likely result in higher volatilities in most asset classes going forward. Nevertheless, with revenue growth the new mandate for sustained earnings growth, businesses will need to hire and invest in PP&E, rather than simply cut costs and buy back stock. Undoubtedly, the unshakeable determination of corporation leaders, entrepreneurs, and motivated workers to find a way to move their businesses forward, despite the obstacles, will pull the economy and the standard of living of working Americans along with it.

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Among the positive signs, Bloomberg reports that nearly 80% of S&P 500 companies have beaten earnings expectations so far this reporting season. On Thursday, the U.S. Dept of Commerce reported that the U.S. economy grew at a +3.2% annual rate during Q4, which comes on the heels of the +4.1% rate logged in Q3. Exports also grew, and consumer spending rose at its fastest rate since 2010. GDP hit a new all-time high of $16.2 trillion. Before the recent stock market pullback, the total market cap of all U.S. publicly traded companies had reached nearly $20 trillion.

It’s interesting to note that with the strong outperformance of Google (GOOG) so far this year, the stock is approaching a $400 billion market cap that would put it in league with Apple (AAPL) and Exxon Mobil (XOM) as the largest companies in the world. By the way, $400 billion also happens to be entire GDP of Argentina, so don’t get too much in a dither when you hear about currency devaluations and the 25% fall in the Argentinean stock market. In fact, much of the pain in emerging markets has been concentrated in the natural resource exporting countries -- meaning that the developed economies benefit from lower raw materials and commodities prices.

The International Energy Agency has predicted that the U.S. will surpass Saudi Arabia in oil production by 2020, and we are already considered to be the Saudi Arabia of natural gas, which is now priced 80% lower than it was just four years ago. Lower energy costs coupled with rising standards of living around the world are making the U.S. look attractive once again for manufacturing. General Electric (GE), Whirlpool Corp (WHR), and Caterpillar (CAT) have led the way in bringing back factories, as have many foreign-based firms.

SPY chart review:

The SPDR S&P 500 Trust (SPY) closed Friday at 178.18, which is just slightly lower than where is finished the previous Friday. So the past week provided further technical consolidation. There is plenty of speculation as to whether we are in the midst of “the” long-overdue market correction, which might bring it down as much as 10%. So far, it has only fallen about 3%. Oscillators RSI, MACD, and Slow Stochastic are all in oversold territory and could be foretelling a market bounce this week. Bollinger Banks are spread wide, after being so closely pinched just several days ago, which further supports a bounce. The 100-day simple moving average is providing support, as is 177.50, which was a prior level of resistance-turned-support. The long-standing bullish rising channel is still intact, and next levels of support are the lower line of the rising channel (around 176), followed by prior support at 175. Notably, a similar bullish rising channel in the Russell 2000 small caps is still intact, as well.