Is the End of this Stock Market Correction Near?
Stock-Markets / Stock Markets 2010 Feb 10, 2010 - 08:15 AM GMTIn last week’s Money and Markets column, I told you about some stock market indicators to watch.
Since then, the market has fallen even further. So today I want to update you on what’s happening now, and what I think about the additional weakness in stocks.
The main question we need to answer …
Is This the Start of a New Bear Market Or Just a Typical Correction?
First, let’s define our terms. A typical stock market correction delivers a 10 percent loss, give or take a few percentage points. Meanwhile, a bear market is generally a loss of at least 20 percent.
At Friday’s low, the S&P 500 was down 7.9 percent from its January high, and the Nasdaq Composite was down 8.4 percent. That’s already close enough to make this correction a typical one. And the additional weakness on Monday put the market even closer to the standard correction.
During an ideal correction, prices come down to the rising 200-day moving average. And as you can see in the chart below, the S&P 500 is nearing major support at the rising 200-day moving average with momentum already oversold.
Source: www. decisionpoint.com
This important support line is currently at 1,019 for the S&P and 2,023 for the Nasdaq. So nothing to get worried about there yet, either.
Source: www. decisionpoint.com
What’s more, volume picked up considerably on Thursday and Friday, with Thursday’s down volume representing 97.3 percent of total volume. These are clear signs of panic.
Momentum indicators also fell to oversold levels. And market breadth was very lopsided, with breadth-based indicators flashing deeply oversold levels.
Finally, sentiment indicators show that a fair amount of angst has returned to Wall Street:
- In January, the American Association of Individual Investors showed 48 percent bulls and only 22 percent bears.
- As of February 4 this picture has totally changed, bullish sentiment is down to 29 percent and bears are up to 43 percent.
- Plus, this survey was taken before Thursday’s and Friday’s market action.
The recent market downturn is signaling a correction, not a new bear market |
Other sentiment indicators are confirming these bearish readings. For instance, at 1.21, Friday’s CBOE put-call ratio was high.
All of this tells me that we’re witnessing a correction, not the beginning of a new bear market.
Plus, if this were the beginning of a bear market, we should be seeing at least some deterioration in leading economic and leading stock market indicators. So far that has not been the case.
Indeed, all of my short-term indicators are telling me that we are approaching the end of this stock market correction. Although we may not be there yet, we are close.
Best wishes,
Claus
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