Not Time to Panic

After a beautiful first quarter, which brought the S&P 500 a wonderful 12% return, things turned drastically downward. So far this month, the S&P 500 is down 2.82%. What is going on? Are we in for continued downward spiral or is this a correction?

If you look at the first-quarter numbers, they all reflect rebound in economy and show growth.

The top performing sectors showed continued stabilization of the financial sector, increase in technology spending and consumer confidence.

The picture is quite the opposite this month.

The stock market has dropped, with relative outperformance of the three out of five leading sectors being defensive (staples, utilities and health care). Is this a sign of things to come or a correction?

Our Rockledge analysis, Sector Scoring and Allocation Methodology (SectorSAM) is showing sector forecasts that point to a growing economy for this month.

Last month, we had long positions in the four out of the above five outperforming sectors that we were long — except industrials.

The longer-term fundamentals suggest again that materials, energy, technology and financials are undervalued, while defensive plays such as utilities, health care, staples and discretionary sectors are overvalued. The analysis seems to suggest that in the longer term, the U.S. markets and economy appear to have rounded the corner from the recession into an early expansion. However, global distractions continue to weight in. Slowing growth in China, continued uncertainty in Europe and persistent unemployment at home continue to cloud the short term, and impacting energy and materials sectors, which are dependent on global demand.

Our SectorSAM analysis shows a mildly bullish forecast for materials and weakly bullish forecasts for the energy, financials, industrials and technology sectors. The fact that industrials turned from an under performing position and joined the outperforming sectors this month, paints an increasingly growing economy. But, because forecasts are mostly weak, the analysis forecasts the growth to be slow.

I cannot say how long this dip will last, but I do not believe it is time to panic and go into cash. At this stage, I think it would be prudent to stay in the market. Otherwise, you might miss the upswing. For more aggressive investors, this could be a time to “buy on the dip” for some of your favorite ETFs.

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At the time of publication, Gurvich and Rockledge clients had long positions XLB, XLE, XLF, XLI and XLF and short positions in XLP, XLU, XLV, XLY and SPY.