This Is the Correction We Didn’t Get After QE3 Became Real

Correction We Didn’t  Get After QE3 Became RealThe more I look at this stock market, the more blue chips I see declining in price, many of which are blue chips that previously hit new record highs. The perfect example of this is Starbucks Corporation (NASDAQ/SBUX), which is feeling the effects of austerity and slowing international growth. Starbucks recovered strongly from the stock market’s financial crisis low in March 2009, rising almost six-fold. In April of this year, Starbucks hit an all-time record high on the stock market of $62.00 a share, but has since declined to the $42.00 per share level. It’s another example of a previous stock market leader breaking down before the mini-rally, driven by a third round of quantitative easing (QE3), and not participating with it this past summer. A stock chart of Starbucks is below:

 Starbucks Corp Chart

Chart courtesy of www.StockCharts.com

All these price breakdowns among blue chips before the QE3-driven, low-volume rally signaled a shaky performance by the stock market this summer. All these blue chips may accelerate again if the earnings growth and visibility come through for the third quarter, but frankly, this isn’t very likely. Intel Corporation (NASDAQ/INTC) peaked in May of this year at $29.27 a share; now it’s getting close to $21.00 a share, with lowered Wall Street estimates across the board. Intel’s stock chart is below:

 Intel Corp Chart

Chart courtesy of www.StockCharts.com

The saving grace for the current state of the stock market is its valuation, and among blue chips, most are fairly priced given their earnings. Where we go from here depends on visibility for the fourth quarter. We know that the Federal Reserve will keep flooding the system by increasing the money supply and buying mortgage-backed securities. An accommodative Fed is fully priced into this stock market. The sovereign debt crisis in Europe and the “fiscal cliff” in the U.S. are significant risks going forward, but the key for the stock market today is earnings growth; if earnings growth proves to be in decline, then share prices will follow.

There are a lot of blue chips that have proven to be excellent wealth creators in recent history and over the long term. Frankly, in the age of austerity, I’d be looking to take on or add to existing positions in those blue chips with solid track records, but only during meaningful stock market corrections. Stocks that come to my mind are International Business Machines Corporation (NYSE/IBM), Colgate-Palmolive Company (NYSE/CL), Abbott Laboratories (NYSE/ABT), Union Pacific Corporation (NYSE/UNP), and perhaps even Apple Inc. (NASDAQ/AAPL).

We might even be at the beginning of a stock market correction as third-quarter earnings season gets underway. Many blue chips are going down in price, and the only thing that will turn them around is increased earnings guidance for the fourth quarter. I would not be a buyer at this particular time.