Somebody once taught me to look on the bright side of life, which is advice I always tried to keep close, even when the cause seems lost. The loss of momentum for stocks on Monday was defined by a close 1.6% below the 200-day moving average. Indeed the slide below the key technical level might have accelerated selling pressure and further soured investor sentiment. An optimist might look at things another way. The S&P 500 index is now only 7.3% below its historic peak. An optimist might also consider the return of volatility as an opportunity to make hay while the sun shines. Not only is the spike in volatility a boon for option traders, but also the jump in implied readings on many stocks offers greater income potential from shares already owned.
The slide in stocks may separate the wheat from the chaff, wiping out, in some cases, year-to-date gains on stocks whose fortunes rose as the tide came in. Investors having second thoughts about their selections can, in some cases, sell their losers and minimize tax liabilities on companies that didn’t fully live up to expectations in the bull run. At its recent peak, the forward price/earnings ratio on S&P 500 companies stood at 16.8-times expected earnings. The setback has lowered the PE ratio to 15.25-times.
All of a sudden, the stock market appears to face an extended run of ultra-low interest rates, even as stock valuations have become more attractive in recent days and weeks. The yield on the 10-year has fallen in direct response to global stock market weakness. Granted, some of that weakness is driven by fears of a slowing global economy. The 10-year US yield on Tuesday fell to 2.18% and its lowest since June 2013. Money market investors have pushed out their expectations for the takeoff for short-term interest rates to one-year from now.
And finally, for those investors previously concerned that the market was attractive but too full of hot air, take a look at the following chart. It shows that the number of S&P 500 index stocks above their 200-day moving average has fallen to 41.4% - the lowest reading in three years. For the tech-laden Nasdaq composite index and the small-cap Russell 2000 indices, just above one-quarter of stocks remain above their 200-day moving average following the recent washout. An optimist might just argue that with plenty of blood on the streets already, the latest correction for stocks has an appealing silver lining.
The slide in stocks may separate the wheat from the chaff, wiping out, in some cases, year-to-date gains on stocks whose fortunes rose as the tide came in. Investors having second thoughts about their selections can, in some cases, sell their losers and minimize tax liabilities on companies that didn’t fully live up to expectations in the bull run. At its recent peak, the forward price/earnings ratio on S&P 500 companies stood at 16.8-times expected earnings. The setback has lowered the PE ratio to 15.25-times.
All of a sudden, the stock market appears to face an extended run of ultra-low interest rates, even as stock valuations have become more attractive in recent days and weeks. The yield on the 10-year has fallen in direct response to global stock market weakness. Granted, some of that weakness is driven by fears of a slowing global economy. The 10-year US yield on Tuesday fell to 2.18% and its lowest since June 2013. Money market investors have pushed out their expectations for the takeoff for short-term interest rates to one-year from now.
And finally, for those investors previously concerned that the market was attractive but too full of hot air, take a look at the following chart. It shows that the number of S&P 500 index stocks above their 200-day moving average has fallen to 41.4% - the lowest reading in three years. For the tech-laden Nasdaq composite index and the small-cap Russell 2000 indices, just above one-quarter of stocks remain above their 200-day moving average following the recent washout. An optimist might just argue that with plenty of blood on the streets already, the latest correction for stocks has an appealing silver lining.