photo by andreia

Written by Dave Young, President of Paragon Wealth Management

After initially recovering from the flash selloff two weeks ago, the markets have spent the past six market days going down.

Including today’s 376 point sell off, from their recent highs, the Dow is down 10.2 percent, the S&P is down 12 percent and the NASDAQ is off 12.9 percent. This is the first official “market correction” since the bull market began 14 months ago.

The VIX, which measures volatility hit 46 today, indicating extreme fear. Historically, a reading above 42 generally triggers a buy signal. That is usually the point where the market reverses and starts moving back up. The only exception to that rule was in the 2008 bear market where for the first time ever the VIX moved beyond 45 and kept going as the bear market got more and more extreme.

So is this going to be a rerun of 2008?

That question stokes the fear and is in the back of everyone’s minds.

This sell off is being driven primarily by concerns over the economic mess in Southern Europe, in other words, Greece, Italy, Spain and Portugal. The list of concerns is too long to put in this blog post. Those concerns come from traders who assume the worst possible scenario. They then further exaggerate the situation by imagining every possible related problem that might occur.

There are legitimate issues to be concerned about. In my opinion, and I emphasize, only in my opinion, I don’t think that this is a return of 2008. I believe that this is a regional issue that is currently causing the U.S. markets a lot of unnecessary grief.

Of course nothing operates in a vacuum, but if you look at the U.S. market alone, it appears to be reasonably healthy.

Earnings, which drive stock prices, have been nothing short of amazing. Companies have consistently beaten their earnings estimates each of the last five quarters. Beating their estimates has caused many companies forward PE ratios to move to a level that normally indicates significant undervaluation.

In summary, it appears that many areas of the market are relatively cheap again. Also, the correction has once again made market sentiment favorable for the U.S. market. In other words, now we see compelling reasons to buy U.S. stocks. The mess in Europe is currently throwing cold water on all stock markets. We believe that once the fear surrounding European mess dissipates, (for whatever reason) our markets and a few others may be very well positioned to resume their upward trend.

What we don’t know, is how long before the fear surrounding the mess in Europe diminishes. It may be soon or it could take a while to play out.

This sell off reminds me a lot of the Asian crisis in 1998. That selloff was short and sharp, and its subsequent recovery was relatively the same.

The most important issue for you as an investor is to make sure that you are invested according to your risk tolerance so that you can ride through the volatility.

Stay tuned…

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