Why a Severe Stock Market Correction’s Imminent

Severe Stock Market Correction’s ImminentIn a sense, the stock market continues to be held hostage by the continuing sovereign debt crisis in the eurozone and the “fiscal cliff” in the U.S. But investor sentiment changed before recent worries regarding these two issues, and corporate earnings growth is slowing. I think we’ll be very lucky to see any gross domestic product (GDP) growth next year from Western economies.

Wall Street still expects broad-based earnings growth next year, but the estimated pace of this growth is being reduced considerably. Lots of Dow stocks, even Exxon Mobil Corporation (NYSE/XOM), are seeing their earnings estimates revised lower for 2013.

So we’re in a stock market where investment risk is high, uncertainty is great, and earnings outlooks are going down. It’s not a great time to be a buyer.

Apple Inc. (NASDAQ/AAPL) remains this market’s perfect benchmark stock, capturing investor sentiment at its core. Apple’s share price is now off its recent all-time high by $160.00 a share—that’s correction territory and the stock’s near-term downward trend looks intact. Apple’s stock chart is below:


Apple Inc Chart

Chart courtesy of www.StockCharts.com

And the pain (on the stock market) doesn’t stop there; Amazon.com, Inc. (NASDAQ/AMZN) is now at a major technical price floor and is very close to breaking down further. Google Inc. (NASDAQ/GOOG) is holding up okay in this market for now, but the position is still off by $100.00 a share since last month. (See “What Many Blue Chips Are Signaling.”)

The stock market is at a crossroads right now. All the information is in the marketplace: the declining expectations for earnings, the continuing sovereign debt crisis in the eurozone, and the looming “fiscal cliff” in the U.S. In my view, the key to preventing a severe stock market correction in the near future is for policymakers to act in a way that creates a lot more certainty for investors. That’s all the stock market wants right now; earnings growth is secondary.

Frankly, I think investment risk in the equity market is too high to warrant making new investments. If a full-blown stock market correction takes place, it probably would be a good buying opportunity. But if it doesn’t, I don’t see the point of taking on new positions in an environment of falling earnings outlooks.

According to the data, the U.S. economy is experiencing a modest recovery in a number of sectors. But the other issues around the world are too great an uncertainty for stock market investors to ignore, and this is why investor sentiment has deteriorated so rapidly since third-quarter earnings season. The stock market is due for a technical bounce-back, but it won’t last so long, as so much uncertainty exists for the next six weeks.