The Dow bounced back Monday after closing below 12,000 on Friday for the first time since March. After six weeks of losses, is the stock market at the beginning or at the end of its correction? James Paulsen of Wells Capital Management, Alan Valdes of DME Securities and Matt Shapiro of MWS Capital shared their insight into which direction the market might take going forward.
Paulsen thinks the market correction could persist a little longer, but it’s closer to the end than the beginning.
“I think that we're setting up, whether it's now or later this summer, we're setting up for a second half rally both as the economy accelerates a bit and as the stock market, I think, is going to set new recovery cycle highs before the year is out,” he said.
The reason, Paulson explains, is there’s been a great deal of improvement in terms of lowering yields, capping rising energy prices and keeping higher commodity prices from pressuring profit margins.
Despite the S&P currently trading at about 13 times 2011 average earnings estimates of $95, some investors might not be buying on the correction because of uncertainty with the Federal Reserve's next move, according to Valdes.
“They come out with QE2, they have a nice rally,” he said. “Now I think you’re seeing traders back off because they don’t know what’s going forward."
“You saw the market rally between QE1 and QE2 [rounds of quantitative easing], the market came in at 1600 points — it shows the market has no sustainability,” Valdes added.
Valdes thinks the only "saving grace" for the market is another round of quantitative easing.
Look at 'Solid Blue Chips'
Meanwhile, the market is dominated by short-term traders, while long-term investors remain ambivalent, according to Shapiro.
Still, Shapiro maintains there are opportunities in the market, especially in the blue chip stocks.
“In the Dow, many of the solid blue chips have 20 percent return on equity and in seven, eight, nine years you're going to get your initial investment repaid in earnings and dividends.”
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Disclosure information was not available for James Paulsen, Alan Valdes and Matt Shapiro or their companies.