Debunking the Summer Stock Market Crash (QQQ, AAPL, GE, DOW, CAT, XLE, XLI, SLV)

Certainly by now you have heard the term “Sell in May and go away!”  This was just one of the ten reasons that we noted why investors might need to worry about the possibility of a 10% stock market correction.  This would have saved you serious money in 2010, but with all theories there are also ways to refute or rethink the thesis.  We have just seen a unique set of data debunking the whole theory of “Sell in May and go away!”  A well-respected colleague and friend has outlined some of the myths behind “Selling in May” and has found something entirely different.  Mike Tarsala of Reuters has said that this theory is for sissies in a detailed video with technical and fundamental analysis. 

Imagine if we really do get a correction.  How many investors want into the market in some of the great quality names.  Now that the NASDAQ 100 has rebalanced, measured by the PowerShares QQQ (NASDAQ: QQQ), Apple Inc. (NASDAQ: AAPL) is less of the index and that index has enough stronger components now that it can actually fall 10%.  What about the re-emergence of companies like General Electric Co. (NYSE: GE), The Dow Chemical Company (NYSE: DOW), and Caterpillar Inc. (NYSE: CAT)?  Many investors would love to get a chance to get into these winners.

G.E. has recovered much of its losses from the peak of the Great Recession when its shares went well under $10.00.  Its shares would have to fall to $19.50 for a 10% correction to be realized. With a 52-week trading range of $13.75 to $21.65, many investors would love a shot to get GE shares down 10% again. Thomson Reuters has a consensus analyst target of over $24.00 today.

Dow Chemical has also regained much of the losses from the Great Recession and shares were looking like they might hit as low as $5.00.  Its shares are down over 4% and around $39.10 today.  Its 52-week range is $22.42 to $42.23, so a 10% sell-off would be a chance to buy back in around $38.00. Thomson Reuters has a consensus analyst target of almost $47.00 today.

Caterpillar Inc. (NYSE: CAT) is back close to all-time highs because of the global recovery, but its shares were under $30.00 at the peak of the Great Recession.  The stock is down nearly 3% at $109.60 today.  With a 52-week range of $54.89 to $116.55, a 10% correction would allow investors to buy in at just under $105.00.  Thomson Reuters has a consensus analyst target of over $129.00 today.

A few of Tarsala’s points worth noting are that the S&P is very cheap at under 13-times forward earnings and we have already seen five consecutive quarters with revenue and earnings growth, and the quality of earnings looks solid.  He specifically cites data in the key ETFs of Energy Select Sector SPDR (NYSE: XLE) and in Industrial Select Sector SPDR (NYSE: XLI).  In another presentation, Tarsala analyzes earnings season and shows how the earnings quality is better than we have seen in years.

Investors are now likely to feel burned by silver and “the safe haven of the new currency.” The iShares Silver Trust (NYSE: SLV) has been the biggest silver play for retail investors in silver of all.  After peaking above $48.00 just two weeks ago, its shares closed unofficially down over 8% at $34.49 and that is now down about 30% from the peak.  How many investors who just caught the silver burn will go back there quickly?  The little guys jumped into the devil’s metal only to find that the rules of the game were changed without notice based upon margin requirements.

A 10% stock market correction would probably take the sails out of commodities even more than you have seen in the last ten days and it would probably take away the near-unilateral belief that interest rates are about to skyrocket.  This could establish lower floors that the ‘launches’ would take off from in the future.

As we noted when we gave our own thesis for a possible correction… Imagine how many investors could finally get back in the market at decent prices.  In some ways, maybe we should all hope for a 10% correction after all.

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JON C. OGG