3 reasons yesterday’s sell-off wasn’t the end of the bull market

 

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This sell-off is getting painful and it may get worse before it gets better. That’s healthy. I’ve got three reasons the bull market isn’t dead just yet.

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Stocks took a hit yesterday with the S&P 500 losing one and a half percent. But the bull market isn't over yet and Jeff Macke has three reasons why.

Stocks took a hit yesterday with the S&P 500 losing one and a half percent. But the bull market isn’t over yet …

First the pain. Obviously there are plenty of reasons to be afraid. In September we were at all time highs. Three weeks later most of the gains for this year are gone on the major indexes and key technical support is either broken or on the verge of snapping.

Yesterday alone the Dow fell 272 points marking its fourth worst day of the year and leaving the headline index less than 1% higher for 2014.

Fundamentally we have Europe slowing, Ebola threatening to bring travel to a halt, Japan crumbling, Russians hacking into our banking system, QE ending and profit warnings getting issued on a daily basis. I’m sure I missed something but you get the idea. It’s October and there are plenty of ghost stories in the air.

This is what the start of corrections look, sound and feel like. Frankly we’re overdue for a steep sell-off but that doesn’t mean this is the start of a crash or a bear market. It’s an opportunity. Let me give you three signs of health under the headlines.

The “right stocks” are getting crushed

Yesterday shares of a retailer that never should have been public in the first place and a company that makes delicious seltzer water each fell more than 20%. The Container Store (TCS) and Soda Stream (SODA) are two good companies run by perfectly respectable people, their stocks getting beaten like government mules makes sense. It’s a sign of health.

Fad stocks getting crushed is supposed to happen. It’s a sign of excess being taken out of market. That hurts but it’s healthy. Sorry to be harsh but this is business. If you got trapped long these shares consider your loss tuition at the school of investing.

Investors are waking up to risk

The three worst performers in the S&P 500 yesterday were United Rentals (URI), Best Buy (BBY) and General Motors (GM). All three fell more than 5% on downgrades. With all due respect to analysts as a group, recognizing that United Rentals and GM might be facing headwinds isn’t exactly groundbreaking research. Best Buy has done a great job staying afloat but the shares were up almost 50% since April.

When shareholders of these companies go to bed happy and wake up the next day willing to dump shares down 5% it’s evidence of a panic among investors, not rational thinking. Weak hands are getting shaken out of large cap stocks. Again, that hurts but it’s healthy.

The headwinds are scary but fleeting

If you’re new to investing the last few days probably felt shocking, but this sell-off isn’t even major by the standards of this bull market. In 2010 the S&P dropped 16%. In 2011 shares dropped just a whisper under 20% in response to the lunatics in Washington, DC shutting down the government.

Suffice it to say the market survived.

Ultimately all the factors that have backstopped markets since 2009 are in place. U.S. stocks are still the best asset choice in a generally crummy world. Barring an outbreak of inflation, which doesn’t exist, the Fed will reluctantly launch another round of QE at the slightest provocation. Ebola will go the way of SARS.

If none of that is true the world has bigger problems than falling stock prices. I don’t think it is. We’re in a correction. Look for a bottom after the Dow goes negative for the year and the S&P falls below 1900. That should be scary enough to create a whoosh lower. That’s the dip I want to buy.

You’re welcome to take the other side of that bet. In fact, I sort of hope you do. Sell me your Facebook (FB) in the 60’s. Take Apple (AAPL) down to the 70s. I want to buy stocks lower. That’s how good investing works.