Corporate earnings are also referred to as “company earnings” and “corporate profits:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.

In a consumer-driven economy, what retailers say about their businesses is very important. For the most part, the retail sector has been saying that business conditions are getting better. A lot of retail stocks performed very well up until the recent stock market correction and valuations are reasonable. I’ve been writing about an underlying strength in the stock market and the U.S. economy and you can see it right now in the retail sector.

The strong first-quarter financial results of Wal-Mart Stores, Inc. (NYSE/WMT) beat consensus and the company expects strong profit growth in the current quarter. A lot of other brand-name companies in the retail sector reported very good numbers for the first quarter and many retail stocks are trading close to record highs on the stock market. Right now, with all the available news and lower oil prices, I’d say that second-quarter earnings season is shaping up to be surprisingly strong.

So, we have a stock market that’s in correction; however, economic news is showing mixed, but generally improving data. Lower oil prices stimulate consumers to spend and they lower the cost of doing business in the industrial sector. While speculators might bet that lower oil prices are a put option on the global economy, the spot price action directly affects the retail sector and that’s good for the economy.

As I keep saying, if we didn’t have the sovereign debt crisis in Europe, I believe the stock market would be a lot higher than it is currently. Corporate earnings growth may not be robust, but it isn’t flat either. The retail sector has been and should continue to be strong through to the end of this year. (See Wall Street Beats Main Street Again.) As well, a lot of industrial companies are expecting a solid bottom half to 2012. And the outlook for the consumer goods sector is also strong, with companies like Colgate-Palmolive Company (NYSE/CL) and Kimberly-Clark Corporation (NYSE/KMB) trading at all-time record price highs on the stock market.

The structural problems in the U.S. economy and the eurozone are almost entirely related to sovereign debt. This is a fundamental problem that needs to be addressed by policymakers. But consumers are doing their part and, as stock market investors, we can see this in the numbers. I fully expect the retail sector to keep outperforming over the coming quarters and the strength in this industry should trickle down to other sectors for a better-than-expected second-quarter earnings season. That’s my current view right now.

The current stock market correction has some legs, so be prepared for more downside. We’ve got gold below $1,600 an ounce and oil solidly below $100.00 a barrel—this is a broad-based market correction in investable assets and it will likely linger for a while.

The stock market began to roll over naturally after the majority of first-quarter earnings were reported. We were due for a market correction just based on the market’s strong performance from the beginning of the year. Then, the most recent catalyst was the political uncertainty in the eurozone and the continuing worries regarding European sovereign debt. The timing could not have been more perfect. Going forward, I wouldn’t be surprised at all if stock market trading action is difficult right until the end of the summer. Then, it’s election fever. The old adage, “Sell in May and go away,” looks like a winner this year.

In terms of investment strategy, now isn’t the time to be a buyer. I think stock market investors should wait for the current market correction to play itself out, while watching for good corporate news and dividend increases. The spot price of gold is also in correction mode and could be soft for the next couple of quarters, perhaps even into next year. For stock market speculators, I continue, however, to like mining stocks. For the majority of an equity portfolio, higher dividend paying stocks are the only way to go in a slow growth environment.

Investor sentiment isn’t all that bad at this time. The stock market needed a market correction and is gyrating on Europe, but the domestic outlook is still decent and stocks are not expensive. Some industries are doing much better than others, but this is the nature of economic recovery. It takes a lot of time for the system to balance itself out after the mortgage debt-induced financial crisis.

So, if you’re a stock market investor, you need a lot of patience. Most U.S. corporations said in their first-quarter financial reports that they expect business to get better in the bottom half of the year. The fundamentals, in terms of valuations and corporate earnings, are actually pretty decent for the stock market. But, the marketplace is now in fear mode and the biggest problem is all the uncertainty. We’ll see how long this market correction lasts. Anything is possible these days.

I would add that the gift of a material price correction is the opportunity to invest in good companies at a more attractive price. Equally important is the falling price for oil, which has an almost immediate impact on disposable income and corporate earnings. The financial world isn’t coming to an end (at least not quite yet); it’s only going through a well-deserved market correction. There is an underlying strength to the stock market and that’s because of valuations. (See The Best Performing Index Over the Last 12 Years.) Share prices could be soft for the next several months, so retail investors will likely keep to the sidelines. I expect institutional investors to keep buying higher dividend paying stocks throughout the year. I also expect increased dividend announcements right into 2013.

This is the correction we’ve been expecting and it’s affecting stocks as well as commodities. The stock market has been due for a correction after a solid first-quarter earnings season and, because share prices moved so strongly since the beginning of the year. It doesn’t really matter what the catalyst is for the correction; it is well-deserved and a healthy development in my view.

I think the S&P 500 Index is vulnerable now to the 1,300 level and, if it gets there, this would be a meaningful correction and a good buying opportunity for higher dividend paying, large-cap companies. Generally speaking, I think we’re in a time now where the stock market will be more apt to reward income over growth. Large-cap, dividend paying stocks have been leading the stock market since last October and I think this trend will continue right into 2013.

Along with large-cap stocks, both smaller companies and commodities are also experiencing a pullback. Growth concerns in the global economy are real and whether it’s related to price inflation in China or sovereign debt problems in Europe, the new normal is slower economic growth rates, especially among mature economies.

I don’t see any reason why the U.S. stock market can’t reaccelerate this year, especially as we are likely to see sporadic improvement in the economic news. And, while the outlook for corporate earnings isn’t robust, it’s still solid and stock market valuations are reasonable. Investment risk remains high for all equities, but it’s been like this since the financial crisis.

I think that big corporations are keeping earnings expectations purposefully low, in order to outperform come earnings season. (See Earnings Reflect Expectations—the Stock Market Is Fairly Valued.) It’s a way of providing shareholders with “good news” in a slow growth environment. One thing we are getting though is increased dividends and this is great news if you like dividends income with the potential for capital gains. Intel Corporation (NASDAQ/INTC) was the latest brand-name company to up its dividends payment to shareholders and, with so much cash building up on corporate balance sheets, increasing dividends news should continue throughout the year.

As I’ve said, this stock market correction is healthy and well-deserved. The stock market is fairly valued and this gives us a lot of breathing room for a pullback. If I were an equity investor looking for new positions this year, I’d wait until the correction plays itself out and I’d be watching my favorite dividend paying stocks for a good entry point. I still like gold investments for speculators; but, to me, dividends are king in this kind of market.

I’ve been highlighting over the last few months how a key indicator, stock selling by corporate insiders, has continued to rise as the stock market rally continued.

Why do we need to pay attention to what corporate insiders are doing? Corporate insiders are officers, directors and the largest shareholders of corporations. They have a deep understanding of their company, market and earnings outlook.

When corporate insiders are buying stock in the companies they work for, investors often think this is a key indicator to buy, as it may indicate that the company’s earnings outlook is improving. When insiders are selling, it could be a key indicator something is up, and so investors often consider selling.

Argus Research has just released its corporate insider sell-to-buy results for April 2012. In March, the insider sell-to-buy ratio was 5.77-to-1, which means that, for every 100 shares insiders bought, 577 shares were sold by insiders. In April, this key indicator deteriorated further to 6.56-to-1 (source: MarketWatch, March, 6, 2012).

The last time this key indicator had this high a reading was May 2011, which coincided with the last market top!

After two months of consistent and increasing corporate insider selling, a correction at the very least usually ensues, according to this key indicator.

Another company that follows corporate insiders, Trim Tabs Research, has seen its sell-to-buy insider ratio go from 5-to-1 in January to 15-to-1 in February, to 20.8-to-1 in March!

Corporations have been warning about their 2012 earnings outlook, as evidenced by the fact that corporate earnings growth has been slowing due to the global economic slowdown.

While some remain bullish on the prospect for higher stock prices, these key indicators of corporate insider selling are indicating that, if investors want to buy shares of corporations, corporate insiders are ready to sell their shares to them.

This is not a good sign on what has been historically a reliable key indicator. Given the earnings outlook for corporations for the remainder of 2012, I’d rather follow the corporate insiders, as I believe they know more about what is happening within their firms than the rest of us do.

Michael’s Personal Notes:

The action in the gold bullion market was rocky yesterday. Here’s what my esteemed colleague Robert Appel, BA, BBL, LLB, has to say about gold:

“Yesterday, the $1,630-per-ounce pivot in gold bullion was broken to the downside. This coincides with massive problems in Europe and strength in the greenback. As a result, we expect the gold bullion complex to work even lower before finding solid support.

“By no coincidence, the ‘gold bashers’ have brought new talent to their CNBC road show, a spectacle in which they explain what a terrible investment gold bullion is!

“First Warren Buffett, now Bill Gates. This is in spite of the fact that, over the last 10 years, the price of gold bullion has outperformed both Berkshire Hathaway and Microsoft both! What is going on? On one level, clearly the chaos out of Europe is, indeed, chaos. As we have reported, the European Union, that ‘grand design’ from the ‘one-worlders,’ was a disaster.

“Welding together the economies, the habits, the social structures, and the currencies, of two cultures as far apart as Greece and Germany, for example, made no sense then—and makes no sense now.

“And the one thing all, repeat ALL, Western nations agree on is that they don’t need strong gold bullion right now to tempt buyers away from paper currencies, which are already in a death spiral, hence the massive selling at the paper level. (Note that we said ‘paper level’—as Eric Sprott, one of the largest players in the realm of physical gold bullion recently reported, there is an actual shortage of hard bullion at these prices for those who want delivery of the asset instead of the script).

“But, as with anything, you have to be careful what you wish for. A strong U.S. dollar will choke the already-fragile U.S. recovery to death, something that the boys on the Hill don’t want or need in an election year.

“So, amid the chaos, amid the confusion, our view is that the party is not over until it’s over. By the end of the summer, or early fall at the latest, we expect a spectacular recovery in the gold bullion complex. And we also expect the metal to return to the $1,630-per-ounce pivot sooner rather than later.”

Personally, I like to buy when the majority of investors are selling and sell when the majority of investors are buying. It is in that vein that I bought more gold-related investments yesterday. (Also see: Is the Bull Market in Gold Over?)

Where the Market Stands; Where it’s Headed:

It could have been much worse for the stock market yesterday. After all, most major European countries are back in recession. China’s economy is slowing. Japan is back at it…printing money again. And here in America we have a situation where jobs are not being creating and the central bank is buying government debt.

All this happening while the Dow Jones Industrial Average trades at 13,000…that’s 15 times our estimated earnings for stocks that trade in the index. Fifteen times earnings is a good number when earnings are growing…but not when corporate profits are stagnant, as they are today.

Since March 2009, I have been saying that we are in a bear market rally. My opinion remains unchanged. The rally has been extended by artificially low short-term interest rates, out-of-control government debt and money printing…events that cannot go on indefinitely.

The stock market is putting in a huge top here at which point the bear market rally will retire. (Also see: Proof Stock Market Rally’s Just an Old-fashioned Bear Trap.)

What He Said:

“The proof the party is over in the U.S.housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt most when the air is finally let out of the housing market balloon will be those buyers who bought in late 2005. In fact, the latecomers to the U.S.housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. Michael started warning about the crisis coming in theU.S. real estate market right at the peak of the boom, now widely believed to be 2005.

If the S&P 500 Index is trading close to the 1,400 level, then I view the equity market as being in good shape. We’re getting a bit of a consolidation now and this is completely normal after the flurry of corporate earnings from large-cap companies. Many smaller companies are only now beginning to report their earnings reports, but this is an equity market that’s focused on large-caps. They have been and I believe will continue to be the outperformers this year. (See Benchmark Stocks Reporting Great Earnings—But the Stock Market Bet on this Already.)

Institutional investors are waiting for a new catalyst to invest in this stock market; without one, the equity market will drift. There is a normal lull in share prices after an earnings season and it’s because the corporate news is over and share prices rose in anticipation of the numbers. Why buy a stock after it reports numbers the Street was looking for? I still believe that investors don’t have to be in any rush to consider new positions in the current environment. If we got a major correction in the equity market, then I’d say add to existing positions. Overall, though, I expect the stock market to become very vulnerable around the time of the U.S. election and going into next year. I could be wrong on this, but I don’t see economic growth accelerating much more than its current rate.

The U.S. economy and the stock market can move forward just fine in a slower growth environment. We just don’t want to see contraction in gross domestic product (GDP) and that’s why the Federal Reserve is doing everything it can (rightly or wrongly) to try to reinflate the economy. The equity market can handle declining rates of growth, but it can’t handle actual contraction in GDP. Because the stock market is fairly valued, this gives stocks a lot of leverage to handle bad news. I think the economy is moving in the right direction, but, just like in industry, it’s doing so in a choppy, uneven fashion.

I would say that the recent batch of economic news is signaling a slowing down in economic activity from the first quarter. The stock market is actually digesting this news quite well and buyers are coming back to the equity market even after disappointing news. But what the current economic news supports in my view are declining expectations for the future—in GDP and corporate earnings and for the stock market. Accordingly, I wouldn’t be surprised if Street analysts were to revise earnings outlooks lower for the bottom half of the year.