Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Stock Market Correction Over?

Stock-Markets / Stock Markets 2011 Mar 11, 2011 - 05:30 AM GMT

By: John_Hampson

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleIn my analysis of March 2nd I suggested the stock market correction should last around 4 weeks (based on cycles and previous corrections) and sufficiently reset overbought or extreme indicators in order for the cyclical bull to continue. Today the correction is 3 weeks old, and we have seen just over 50 points wiped off the S&P500. So is it shortly a buy again?


Let's dive in.

--------------------------------------------------------------------------------

1. Investors Intelligence Bullish Sentiment has declined but not yet sufficiently.

Source: Market Harmonics / Investors Intelligence

2. Retail investors continued to pump money into domestic equity funds with inflows of $4.8 billion in the week ended March 9th. This remains a contrarian negative.

3. Most technical indicators are now no longer at overbought levels but nor sufficiently low to flag a buy.

4. Crude Oil remains over $100, following a 20% gain in 2 weeks. Bespoke Investment research reveals that previous such fast strong rises in the oil price resulted in negative average returns for the S&P500 of -2.25% over 1 month and -4.13% over 3 months.

5. Ciovacco's proprietary bull market sustainability index is still flagging a near term stock market correction.

Summarising points 1-5, we should be wary of buying yet. Let's look wider.

--------------------------------------------------------------------------------

6. Copper, which is typically a general bellweather, has formed a head and shoulders pattern, suggestive of further declines.

Source: Stockcharts

7. The US Dollar has also put in a bounce at a critical level. There is a typical historical inverse relationship with stocks.

8. And treasury yields have also just retreated from long term resistance. Such action also typically correlates with stock market pullbacks.

In short, we may need to await fulfilment of these counter moves in copper, dollar and treasuries before stocks can advance again in earnest. However, given the fundamentals and longer term trends in all three of these assets, we may be seeing short lived counter moves, and charting the S&P supports this idea:

9. The S&P500 is flirting with the 50 day EMA, which previously acted as support, and has made a fairly evenly-weighted ABC-style correction, which would normally be suggestive of an imminent conclusion to the correction.



Source: Afraid To Trade

--------------------------------------------------------------------------------

Now let's look at the underlying cyclical bull market and the case for further advance following this correction.

10. QE/Pomo is scheduled to continue to June. I previously analysed the supportive role this plays for the stock market and the chart below reveals the recent record totals deployed. Money supply measures are showing strong growth.


Source: Quantifiable Edges Blogspot

11. The Presidential Cycle sweetspot for equities persists this year, particularly into June also. We are currently in Q1 of the pre-election year, shortly entering Q2 in the chart below:

Source: Tradersnarrative.com

12. Investment banks have recently upped their targets for year end 2011, looking for an average 10% gains from current levels.


Source: Bespoke Investment

13. ECRI leading indicators are still positive and trending higher:


Source: Dshort.com

14. We still fall short on historical guidelines for cyclical bull endings, namely:

Inflation over 4%
10 year treasury yields over 6%
Stock market topping process accompanied by weakening breadth
Yield curve abnormal
Overtightening of interest rates

Indeed, picking out "stock market topping process", I previously noted that similar bulls from history topped in a range process lasting weeks to months during which market action was confused but internals and the environment for stocks weakened and flags were raised. The 50 point decline in the S&P that we have seen in 3 weeks so far has the hallmarks of a correction rather than a topping process, but it could yet feasibly become part of a topping process if it were to move back up in to the topping range but not exceed the highs. Either way, a move up should follow current action and we will have time to see internals and the evironment weakening, if that were the case.

So are there any such concerns yet?

--------------------------------------------------------------------------------

15. Chris Puplava's recession prediction model has increased a little, and looks to be trending towards warning levels. However, the yield spread recession predictor shows now such concerns:

Source: Chris Puplava


Source: First Tuesday

16. The Bloomberg Financial Conditions index has slipped to neutral and is to be watched for breaking into negative territory:


Source: Bloomberg

In short, there are two watch items but no current red flags.

--------------------------------------------------------------------------------

In summary, the stock market correction has not yet adequately reset overbought and overly-bullish measures, and action in other assets suggests more time may be required. Looking at historical corrections and cycles, another week of corrective activity would be typical and may provide fulfilment on both. The second half of March may therefore provide a buying opportunity. The cyclical bull still looks in good health to continue, with no current warning flags, so I still want to be exposed to the long side. April is a seasonally strong month for stocks and US earnings season gets underway again 11th April, with earnings and revenues still surprising to the upside in the last quarter. With QE/Pomo and Presidential cycle tailwinds into mid-year, I expect stocks can revisit the highs in quarter 2.

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.

© 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.


Comments

Diane
11 Mar 11, 10:50
Great article

Hello John,

This is a very thoughtful article and I have found it very helpful.

You obviously put a lot of thought into your analysis.

Many thanks,

Diane :)


Post Comment

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

6 Critical Money Making Rules