After a scorching run in the first quarter, stocks have suffered a minor but intensifying reversal. The S&P500 is off roughly 4.5% in just eight days; a shocking development to those who grew complacent during the rally that began last December.
With the S&P500 still up over 8% in 2012, many investors are looking to protect their gains by selling, rather than buying the dip. Worse still, the huge camp of those who claiming they were poised to buy stocks upon any dip has gone completely quiet.
According to Hank Smith, chief investment officer at Haverford Trust, investors cowed by the market's decline are making a mistake. What's more Smith actually welcomes the selling.
"We're not intimidated by the pullback" he says, "we think it's healthy."
Smith draws a parallel between 2009 and the late 1970s when stocks were officially declared dead just prior to the start of the greatest rally in history. According to Smith 2009 was a generational low, marking the start of "long-term secular bull market."
The current April woes don't even qualify a "pullback" yet, typically defined as a decline of 5-10%." Only a drop in the S&P of 20% to 1,138 would qualify as a bear market. Less comforting is the fact that we traded at that level as recently as late November of last year.
Smith says the drivers for stocks this year are the amount of money coming out of bond overpriced bonds and into stocks trading at low valuations. Though nothing spectacular, Smith says GDP and earnings will continue to grow, giving equities a tailwind, light though it may be.
Smith's conclusion is that we're one minor sell program away from a chance to start piling into stocks.
"A pullback anywhere in the 5 - 10% range would be a very attractive entry point," he says.
A decline of 10% would take the S&P500 down to 1,278, wiping out all but 1.6% of 2012's gains. If you think people are freaking out now, there could be panic in the streets before we even get to an official "pullback."
According to Hank Smith, that'll be the perfect time to buy.