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The ongoing correction in growth stocks, broadly illustrated by the Nasdaq and Russell 2000 indexes 7% and 8% off their highs, doesn't seem to be dragging down the S&P 500, which is off only 1.5%. One reason is that money is simply rotating into big cap safety instead of running to cash.
So the big question is this: "Can strong earnings and guidance from our top companies generate a rally to new highs before the 'sell in May' alarms start ringing-even as the growth indexes once again flirt with their 200-day moving averages?"
My answer this month has been that institutional investors would be pleased with this earnings season and spur a drive to new highs. But what may finally be coming home to roost is that the market ran well ahead of some of the best expectations for growth in the past year.
Therefore, if earnings estimates don't at least match last year's 5-6% EPS growth, the market will have a hard time moving higher from here. And if institutions in the aggregate take this view, then we'll see the S&P move lower through support in the 1820-50 zone as they become net sellers and foreshadow a deeper correction.
Bottom line: Until that happens, it will pay to stay bullish above that zone and buy dips within it.
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