Looking For Data To Support A Market Correction

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 |  Includes: DIA, QQQ, SPY
by: David I. Templeton, CFA

Posting commentary has been light this past week for a number of reasons; however, topic thoughts often come from interesting articles I read throughout the week. The difficulty of late has to do with the abundant stream of commentary that is predicting the end of this bull market run, i.e., the dreaded 10+% correction which has not been experienced for over two years now.

From The Blog of HORAN Capital Advisors
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Source: yardeni.com

Exacerbating this stream of thought has been the media's effort to stoke fear in investors' minds. This past week CNBC has used its yellow highlight of market indicators to indicate big market down days, yet, on the week, the S&P 500 Index was down only .9%. Given the level of the S&P 500 Index and the Dow Jones Industrial Average, triple digit point declines for the DJIA do not necessarily translate into large percentage declines. I suppose someone will figure out the math behind that eventually.

Avondale Asset Management's Chief Investment Officer posted an article early last week noting that the current bull market run in the S&P 500 Index without a 10% correction is the sixth longest ever. As the below chart shows, this bull market run of 25 months can certainly continue for many more months.

From The Blog of HORAN Capital Advisors
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Source:
Avondale Asset Management

So having commented on the 10% correction fear, is there current data that would be predictive of a market correction. Knowing the economy is not the market, but what does the economic data suggest? Below is a chart dump of some important economic variables and all of them indicate economic strength. I will say though, the economic data is not supportive of a robust economy, but more of a bump along slow growth one. I will not go into the significance of each one; however, interested readers can read about these indicators in a post we wrote in December of 2009, Key Economic Indicators Suggest The Worst Is Behind Us.

Jobless Claims:

From The Blog of HORAN Capital Advisors
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Retail Sales:

From The Blog of HORAN Capital Advisors
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Consumer Sentiment:

From The Blog of HORAN Capital Advisors
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Existing Home Sales:

From The Blog of HORAN Capital Advisors
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Durable Goods New Orders:

From The Blog of HORAN Capital Advisors
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Leading Index Indicator:

From The Blog of HORAN Capital Advisors
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Capacity Utilization:

From The Blog of HORAN Capital Advisors
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TED Spread:

From The Blog of HORAN Capital Advisors
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We discussed several other factors in a post earlier this month, What Event Triggers The Next Market Correction, where we noted the improving trend in negative/positive earnings preannouncements, an improving trend in forward earnings growth, underlying strength in the U.S. Manufacturing PMI. As an update on the earnings front, FactSet is showing a mostly improving estimated earnings growth trend for the Q2 2014 time period. This improving trend has been in place since Q3 2013.

From The Blog of HORAN Capital Advisors
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Source: FactSet

And is the market maybe ahead of where earnings suggest it should be? Maybe somewhat. We do believe the market's valuation is slightly above its long-term valuation average, but not wildly overvalued. Additionally, we do know the market does not correct simply because it might be overvalued.

From The Blog of HORAN Capital Advisors
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Source: FactSet

Are there things investors should be concerned about? Yes. One is the fact the market will correct. Now is the time to review one's asset allocation and reallocate investments from overweighted positions or categories into underallocated ones. Everything around the globe is not a utopia, there are issues in Ukraine, the Middle East and Portugal, just to name a few.

The market does like to climb the proverbial wall of worry. Market stats, like the absence of a 10% correction, are certainly interesting factors to evaluate; however, at the end of the day, "anticipated" economic and corporate fundamentals are important factors to analyze. As Investment Analyst Andrew Thrasher noted in a recent article, Market Stats, Fun Facts, and Why You Can Ignore Them, some of the technical stats are interesting, but investors should use caution in basing their entire market bias on them.