We all know that stocks don’t go up every day. And that even during the healthiest bull markets there will be down days…weeks…and even months.  So, lets discuss the events of this past week so we can chart our course forward.

First, we need to define terms to appreciate what is happening now.

Bear Market: We all know this one. Decline of 20% or more from market highs. The last one was back in 2008-2009.

Correction: Market declines of 10-20%. Scary no doubt…but comes up just short of a bear market level.

Pullback: Reversal of trend back to a previous technical level…like a major moving average. Sometimes can also be a correction, but typically a smaller decline.

So which one is it…and what does that mean for the days ahead?  

Honestly, it is unknown until stocks start going back up on consistent basis. Pullback seems the best explanation, at this stage, as we are testing the 200 day moving average at 2765. Not surprisingly the bounce that occurred on Friday ended the session just above at 2767.  If it is only a pullback, then this 200 day level is quite likely to be tested again, and again before a lasting bounce unfolds.

However, I sense that this one could push into correction territory at 2647 or below. Why? Because the age of this bull run, and the rising rate environment, should lead to a deeper decline to shake off the complacency that has built up. That is especially true for the kinds of stocks that dominate the market cap weighted indices.

We spoke about this in last week’s commentary. Here is that key section again:

“However, because of this (rising rate) backdrop there are two groups of stocks that will likely underperform for a while.

• Income Stocks: As rates go up, it makes the dividend yield by these companies less attractive. So prices often drop to find a better equilibrium.
• Darling Growth Stocks: I am talking about FANG type stocks that have wildly outperformed leading to a premium valuation. They may see a little more right sizing in price as they did Thursday.

The kind of stocks that should work best at this time are in the GARP camp (Growth At a Reasonable Price).”

Note there have been 7 corrections during this 9 year bull market. So it is healthy part of the process for the market to shed excesses and regenerate for the next leg higher.

Are you saying we should wait til we hit correction territory before putting fresh money to work in the market?

No. As stated, it could only be a pullback where we have already seen bottom. I just wouldn’t be surprised to see it go a bit deeper before lasting bottom takes place. But to bet on that outcome could lead to missing out on the bounce.

Think about it this way. If the market is likely to hit 3000 before the year end, then the current decline is attractive enough to put money to work. Those looking for perfect timing in and out of the market find themselves on a “Fool’s Errand”. It is wiser to appreciate that good timing is close enough to the mark.

Speaking of putting fresh money to work, consider doing that with this…

Stock of the Week: Penn National Gaming (PENN)

I am a big fan of entertainment and leisure companies during mature economic expansions like we have now. That is because consumers have already spent money on the needed replacements of appliances, cars, home improvements etc. Now with a healthy employment outlook and rising incomes, they will want to spend extra cash on wants more than needs. Gaming companies like PENN certainly benefit from this trend.

Here are some other positives from a TipRanks perspective:

• 5 analysts covering with 5 Strong Buys and 27% upside to average target price. More details.
• Bloggers are putting their chips on PENN. More details.
• Some top Hedge Fund managers are gobbling up shares. More details.
• Insiders are betting more on themselves which is a very positive indication. More details.