Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Stock Market Correction, How Long and How Deep?

Stock-Markets / Stock Markets 2011 Mar 02, 2011 - 08:34 AM GMT

By: John_Hampson

Stock-Markets

Best Financial Markets Analysis ArticleIn my analysis of February 17th here, I suggested a stock market pullback was imminent but that the cyclical stocks bull was to continue longer term. It turned out to be timely, as we have been in correction since the 18th until today. So how long and how deep should we expect the market to consolidate or correct, and is the case for the underlying cyclical stocks bull to continue still as strong?


First, a note about yesterday, March 1st. It turned out to be a pivotal day, as many expected a push back to the highs powered by first-of-the-month seasonality. Instead we saw a steep and sustained decline. A geomagnetic storm began in the early hours of March 1st and intensified throughout the day, producing auroras over Northern Europe and North America. How is that relevant to the fortunes of the stock market? Read the second half of my February 5th analysis here. Geomagnetic storms and stock market fortunes won't always go hand in hand, just as seasonality won't always fulfil. It is critical to embrace all disciplines that have some correlation with the markets.
 
Here's a recap of why a stock market correction appeared imminent. A window of negative seasonality, negative pressure around the full moon of February 18th and a cyclical downturn due, supported by the bull market sustainability index having moved into a range suggestive of a near term correction and retail investors and 'dumb' money having piled in, usually a contrarian signal. We had also experienced stretched readings for some time in sentiment surveys and call/put ratios.
 
In that analysis (here), I also brought together Birinyi's comparative analysis of historical bulls and two historical rhyming bulls of 1974-6 and 2003-5, which together suggested shallower gains or consolidation over the next few months. Here is one more rhyming bull:
 
 
Source: The Big Picture
 
But before you get too bearish, recall that we are currently in a Presidential cycle sweetspot for equities, particularly for the first 6 months of this year, and there is the exceptional supportive role of QE/Pomo occuring into June (subject to Fed early ending - or extending). Read about its influence on the stock market here. Nevertheless, some caution is warranted.
 
So what do the three rhyming bulls have in common? After a strong uptrend, like the one we have just been experiencing 2010-11, the market topped in a process of chop - up and down and overall sideways whilst market internals weakened. Several weeks or months of flirting with the highs, before a downtrend emerged (either a new bear market or a bull market consolidation period). Tops are typically a process. Therefore, if the strong bull into February 2011 is now ending, or taking a sustained breather, we should not expect an immediate downtrend but a period of market 'confusion'.
 
So let's look at changes in longer term market internals and cyclical bull health measures since February 17th, when the picture was strong.
 
1. Leading indicators have risen further, suggesting accelerating growth ahead (subject to capped gains in the oil price).
2. The earnings season finished with an overall 66% earnings beat rate and 69% revenue beat rate, supportive of further gains for stocks.
3. The US yield curve is still relatively normal but flipping between bear-steepening and bull-flattening.
4. The Bloomberg Financial Conditions index has however fallen, and although still positive, needs watching.
 
 
 
Source: Bloomberg
 
 
So a couple of reasons for caution (3. and 4.), but in terms of what hasn't changed, we still see a cyclical bull in good health: market breadth, money supply and money velocity, stocks relative cheapness to bonds, interest rates, inflation rates, treasury yields.
 
In terms of timing the end of the cyclical bull: comparing the historic internals of this bull,  timing by solar cycles, and estimating when we will reach treasury yield levels, inflation rate levels and interest rate overtightening that typically mark the end of cyclical bulls, then 2012 is currently the earliest we should expect.
 
All things considered, the cyclical bull remains in good health and should sustain for some time, and the likelihood is that we are experiencing a bull market correction. By cycles, this downturn should last an average of 4 weeks, and we should see an adequate resetting of indicators that had reached relative extremes, such as sentiment surveys and overbought technical readings. QE/Pomo and the Presidential cycle, leading indicators and earnings, should then be supportive of further gains into mid-year. However, comparing historical bulls at this stage, we should expect such gains to be hard-won in this period, before the cyclical bull accelerates again in its 3rd and 4th phases from later in 2011 into 2012/2013.
 
So in terms of strategy, I want to play the long side of the stock market until the cyclical bull ending measures are flashing and/or the cyclical bull health measures turn negative. By time, I will be generally looking for this correction to last 3 weeks or more, and by indicators I want to see sufficient resetting. April is a seasonally strong month for the market, both generally and in pre-election years, averaging 1.4% gains over the last 80 years. Later in March we may therefore see alignment of these factors and a good buying opportunity. I don't currently want to play the short side in the face of QE/Pomo and the other listed tailwinds. However, if this is were a market top then we should see a process of chop around current levels lasting into mid-year whilst cyclical bull health measures weaken, which would then provide a more compelling shorting opportunity. 
 

John Hampson

www.amalgamator.co.uk

John Hampson, UK / Self-taught full-time trading at the global macro level / Future Studies
www.amalgamator.co.uk / Forecasting By Amalgamation / Site launch 1st Feb 2011

© 2011 Copyright John Hampson - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules