Two weeks ago I talked about the stock market was undergoing a correction. I said it's not a big crash, just a correction, and I expected it to keep going down for another month by about 10%.
But now, in the last few days, markets have showed some strength and this has led me to wonder if the correction is done.
The S&P 500 has rebounded by 2% in the past 5 days.
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Likewise, the tech sector, represented by the QQQ, has gained 3%.
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The fear gauge indicator known as VIX has dropped by 15% after reaching its highest point of around 17.89 on August 17, 2023.
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And a concern that was bothering the market earlier – the rise in long-term interest rates – has now taken a bit of a turnaround. This can be seen in the increase in prices of long-term bonds, shown by TLT, which have gone up by 2% in the last 5 days.
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Looking at it from a technical analysis point of view, the trend remains bullish as the S&P 500 is higher than its 200-day moving average. Additionally, the price has recently touched one of the trendlines and rebounded, indicating a certain level of robustness in the support.
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Considering the fundamental side, there are positive aspects in terms of company performance. Specifically, the 'magnificent 7' companies, which include Meta and Amazon, have shown a notable recovery in their financial performance. Additionally, Nvidia's results indicate a sustained increase in the demand for artificial intelligence (AI) technology.
The broader market results have also been positive. According to a FactSet report from August 4, 2023, here are some key stats about revenue and earnings growth among the S&P 500 index components:
Seven sectors are reporting year-over-year growth in revenues, led by the Consumer Discretionary and Financials sectors. On the other hand, four sectors are reporting a year-over-year decline in revenues, led by the Energy and Materials sectors.
Eight of the eleven sectors are reporting year-over-year earnings growth, led by the Consumer Discretionary and Communication Services sectors. On the other hand, three sectors are reporting a year-over-year decline in earnings: Energy, Materials, and Health Care.
84% of the companies in the S&P 500 have reported actual results for Q2 2023 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 73%. This number also marks the highest percentage of S&P 500 companies reporting a positive EPS surprise since Q3 2021 (82%).
The overall results are positive. The sectors experiencing declines are primarily linked to commodities, which performed exceptionally well last year. With prices now stabilizing and inflation subsiding, it's logical that their revenue and earnings for the current year would decrease compared to the previous year.
I'm surprised by how strong the market is, considering my initial expectation for it to decline further. It's a reminder that we can't always predict things accurately. Trying to go against a rising market, especially when the upward trend is intact, often doesn't pay off. This is because by the time you wait for more bullish signs to invest, many stocks, even the ones you were eyeing, would have already risen. Missing out repeatedly can be costly.
Thus, I have been largely invested but I also have some cash which I intend to deploy to stocks currently. I might be wrong and the market may reverse again but at this stage I think it is more worthwhile to bet on the bull than on the bear. In fact, markets are bullish most of the time and often climb a wall of worry. It isn't rewarding to be out of the markets for too long.
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