Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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