The ‘CORRECTION’ question
February 18, 2010
The stock market last week appeared headed to its first 10% drop since the March, 2009 rally. And now it appears to be going up again. Is this “correction” over? Just 8 trading days ago, on February 5, the Standard & Poor’s 500 index closed 8 1/2% off its Jan. 19 high of 1150. Many market pundits believe that the early signs of a correction low are there.
In a report, “Is that it for the correction?” Gary Kaltbaum, president of Kaltbaum & Associates, lays out two things he’d like to see before answering with a definitive yes. He’d like the major stock indexes to climb back above their average price trend line of the past 50 trading days, a level which signals an “uptrend.” He’d also like to see a “follow-through” day, where the indexes gain 2% on heavy volume, as it shows real buying interest.” The market action is definitely better,” Kaltbaum says. But asked if the slump is over, he says, “It’s tough to call.”
Since the March 2009 low, the S&P 500 has suffered four drops of 5% or more, with this recent sell-off the worst.
The prevailing sentiment is that the market seems to have forgotten tighter credit in China, bank bashing by President Obama and debt problems in Europe. All of these events had triggered selling in previous weeks.
The market’s bounce can also be attributed to strong corporate earnings for the final three months of 2009 which overshadowed bad news. The prior stock dip also did away with excess optimism that tends to occur at tops. The percentage of bullish newsletter writers has dipped to its lowest level since the March low.
Stocks fare well when traders are “operating with a low-expectation mindset,” says Todd Salamone of Schaeffer’s Investment Research. “The market is now less vulnerable to negative headlines and more likely to rally on positive surprises.”
Put your own thinking cap on and evaluate these opinions closely. And always protect your positions with the use of stop loss orders.
