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Bear party: Stocks in overdue sell-off

April 18, 2013: 12:50 PM ET

Maybe the bull is in hibernation? Stocks have had a rough week. The pullback is long overdue.

Maybe the bull is in hibernation? Stocks have had a rough week. But the pullback is healthy and necessary.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Stocks don't go up every day. And you know what? There's nothing wrong with that.

This week's pullback -- the S&P 500 was down nearly 3% as of Thursday afternoon  -- may be just what the markets need.

I'm not trying to be a gloomy Gus. I personally own a few stocks and index ETFs. I also have a 401(k) chock full of mutual funds that are invested in a mix of value and growth stocks around the world. I want the market to go up. But I don't want it to overheat like in 2000 and 2007, and subsequently crash.

"The sell-off is deserved. We've had almost two weeks of bad numbers for the economy and earnings. This is not the worst thing in the world," said JJ Kinahan, chief strategist with TD Ameritrade.

Many investing experts believe that stocks are sorely in need of a breather after the Dow and S&P 500 surged to all-time highs last week. Some even think a correction, which would be a 10% decline from the recent peak, is in order.

That may not happen. But this week's selling, on a spate of disappointing earnings outlooks, weak economic reports from around the globe and fear sparked by the Boston terror attacks, is a logical reaction. Investors had been too cavalier this year and were pretending that a slowdown in China and the financial quagmire in Europe didn't matter.

"The market is finally responding negatively to bad news. It's a move in the right direction. It's normal and healthy," said Kate Warne, investment strategist with Edward Jones. "Earlier this year, stocks had powered higher no matter what the news was."

But Warne doesn't think this is the beginning of a prolonged and nasty market downturn. She said that the combination of low interest rates (thanks, Fed!) and decent valuations should mean stocks can continue heading higher over the next few years. It just isn't going to be a straight shot up. Volatility is back.

Related: Be afraid? 3 indicators in CNNMoney's Fear & Greed Index show Extreme Fear

John Praveen, chief investment strategist at Prudential International Investments, agrees. He said that it's refreshing to see stocks take a pause from what had been an unusually robust rally. It was surprising, he said, that stocks only had brief "knee-jerk" sell-offs earlier this year in reaction to troubling news out of Europe, particularly the Italian election mess and botched Cyprus bailout.

Sentiment has changed in the past few weeks. Investors are no longer so forgiving. And the tepid forecasts, particularly from banks and techs, are clearly causing some anxiety. After all, one of the main arguments of market bulls is that corporations were still expected to post solid financial results despite the fact that the U.S. economy is in a sluggish recovery.

"The gains we've had this year have been very, very strong," Praveen said. "But earnings guidance has not been that good and people are using that as a reason to sell."

Related: Morgan Stanley wraps up lousy first-quarter earnings reports for banks

Still, how can investors tell if the current slump is merely a short-term blip or the start of something much worse? Keep an eye on banks and housing. There might be reason to worry.

Kinahan said that the lackluster results from JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America (BAC) could be a bad sign for the housing market. JPMorgan and Wells in particular noted that mortgage activity slowed in the first quarter.

If housing is cooling off, that could dent consumer confidence ... and more importantly, consumer spending. Needless to say, that would not be good for stocks.

Related: Why the housing recovery may not last

But Praveen argued that the recent market slide should not come as a surprise at all when you look at how the markets have performed during the past few years.

In 2010, 2011 and 2012, stocks got off to a red hot start in the first quarter. But the S&P 500 dipped in the second quarter each year. Praveen thinks that's likely to happen again, which means that investors who may have been sitting on the sidelines during the first quarter should wait a little longer before buying stocks.

"If you missed the rally, you may have a chance to get back in. Don't jump in right away but buy on the dips," he said.

So instead of sell in May and go away, maybe the phrase should be sell in April and go hide under the table?

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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