Originally published on Oct. 14, 2014
Explaining the dip in the stock market
Lately there has been a lot of volatility in the market. It all started with the slowdown of the European economy forcing the European Central Bank (ECB) to take measures. They expected inflation to be around 2%, but the real number was only a shy 0.3%, and to top things off the unemployment rate was at a high 11.5%.
The numbers indicate that Europe is a long way from being out of the woods. The patient is to some extent still very weakened and relapses can unfortunately not be ruled out. - Yves Mersch, ECB policymaker
The dip is just temporary
This grey outlook triggered a lot of selloffs in the market. Investors do this to capture their gains before allocating their money into new investments or to take some risk off the table. This is fully normal but the media loves to blow stories like these out of proportion and start writing about market crashes and other fundamental shifts in the market.
What is my evidence?
Every single stock has a moment after a sharp rise when people want to take home some of their gains. This is what you see in the market now. However, if a company keeps delivering good results you will see new highs in that stock. It is the same with the S&P 500. To explain my theory, I have added two of the many positive indicators I see:
1) Earnings are still coming in strong:
From the last week's earnings reports: 9 out of 13 companies on S&P 500 showed results above or in line with analysts' estimates. 11 out of them had grown their revenues and 9 had grown their earnings per share (EPS). This is a strong indicator that the market is doing well.
2) Technical indicator pushes the market up:
Price is driven by supply and demand, more specifically, the demand comes from human beings which gives way for behavioral patterns. One of the strongest ones is the floor and the ceiling principal. What looks like a ceiling in the beginning of a chart becomes the floor once the price has surpassed it. As you see in the chart below, the S&P 500 is now trading around 1890 which is right in line with the "ceiling" earlier this year. This will now act as a support for the next growth spurt in the market.
S&P 500 2014
Just to show you how media will twist things I will end this post with a tweet that Business Insider missed in their Dooms Day post.
This is the reason you always should do your research before you invest and not just follow an article you read (this included). If you're a beginner, I suggest to read Steps to Start Investing as part of your research.