I believe we are getting closer to an inflection point that will be triggered by specific events. At this moment, oil and stocks are highly correlated. As a result of this relationship, stocks are completely ignoring company fundamentals and fear has taken over investor psychology. On down days, even airlines (a big beneficiary of lower oil) drop that ignores the fact that oil is the largest cost for the industry.
While we are only about one quarter through the earnings season for small caps, stocks are reacting to macro factors while ignoring company fundamentals. According to Furey Research Partners, the small cap earnings picture is actually better than the consensus estimates. Earnings growth for the Russell 2000 so far is 7.4 percent on 4 percent revenue growth, indicating a slight acceleration quarter over quarter. However, meeting or exceeding earnings estimates and guidance still does not guarantee stock price appreciation. Fear of a global slowdown is the driving force for the recent action in the market.
Here are four things that need to happen in order for us to feel confident that the correction has run its course: