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Tomi Kilgore
April 29, 2010, 12:01 a.m. EDT · Recommend (2) · Post:
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Citi's third stab at $5 should be the charm
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At Viacom, is content still king?
By Tomi Kilgore
NEW YORK (MarketWatch) -- Just because you expect a pullback in the stock market doesn't mean you have to do anything about it.
The big drop in the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 11,189, +143.59, +1.30%) earlier this week may have marked the beginning of a new downward phase for stocks, but there's still no reason to believe the primary trend has changed.
The Dow is now below an uptrend line that started at the early-February low. Although the trendline has lasted just 2 1/2 months, the breakdown suggests the final wave of a long-term wave pattern beginning at the March 2009 lows was just completed. The Dow was at about 11,045 at Wednesday's close, while the extension of the trendline currently comes in around 11,100.
Barron's Jim McTague interviews Jim McCaughan chief executive at Principal Global Investors at Milken Institute Global Conference. McCaughan recommends commercial real estate for this year and emerging markets long term.
According to the Elliott Wave theory, a primary trend extends in five waves, and then corrects in three waves. With that in mind, the Dow's mid-March to mid-June rally can be viewed as the first wave; the pullback through mid-July is the second wave; the advance to mid-January would be the third wave, which defines the primary trend; and the slide ending in mid-February was the fourth wave; and the gains since then represent the fifth wave.
The uptrend line's break indicates that wave has been completed, and that the Dow is starting the first wave of the corrective phase. Because this phase runs counter to the primary trend, it is more difficult to read, and can lead to anything from a sharp correction to a flat consolidation. But as long as the overall macro- and microeconomic fundamentals continue to show improvement, as they do now, it's unlikely that any decline will even be considered an official correction (a decline of at least 10%).
So even if the long-anticipated pullback has finally started, it may not be significant enough for longer-term investors to change their strategy. Myles Zyblock, chief institutional strategist at RBC Capital Markets, said contagion from Europe (and don't forget China) is becoming a more forceful market dynamic, but he still doesn't think it's necessary to make any changes to his strategic recommendations because he believes the economic and earnings recovery are on "strong enough footing" to limit the downside.
Leading economic indicators have risen steadily for a year, and nonfarm payrolls are expected to grow for a second-straight month in April, the first such streak since December 2007. And aggregate first-quarter earnings for the S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,209, +17.45, +1.46%) are so far 51.5% above last year's levels, the first back-to-back quarters of year-over-year growth since the second quarter of 2007, according to Thomson Reuters. On April 1, earnings growth expectations were at 36.6%.
Unless there's a sudden downturn in the U.S. economy it's hard to imagine the Dow falling below what should be very strong support at the 10,500 level (plus or minus 50 points), where there was very stubborn resistance from mid-November through the end of 2009. A drop to the low end of that level would equate to just a 7.2% pullback from Monday's high of 11,258.
Tomi Kilgore writes Taking Stock, a global column that gives insightful analysis about equity-related topics around the world. This column originally appeared on Dow Jones Newswires.
Way back in the early part of this century, Viacom chief and all-father Sumner Redstone was fond of telling analysts and reporters his media-industry mantra: Content is king.
11:48 a.m. Today11:48 a.m. April 29, 2010
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