Revisit the Caution Flag

Revisit the Caution Flag

A month or so ago, I discussed the statistical probability of a change of the bullish stock market trend during the coming months. The view at that time was clearly uncertain.  The indexes had plummeted during the last half of January until February 3, a minus 5.76 percent drop for the S&P 500.

For that broad index and the Nasdaq, the low point has been erased by their reaching new high points. The S&P and the Nasdaq 100 were up by 1.56 and 2.53 respectively at Monday’s close. Remember that a bull market looks like the teeth of a saw tilted up. It will always be two or three steps upward and one or two down.

On the other hand, the Dow Jones 30 Industrials is still one to two percent below its December 31 top. It fell 7.26 percent from year end through February’s first trading day. If it does not surpass its record high of 16,588 in the next few weeks, its uptrend will be in doubt. While those 30 giant stocks are important, the other two groups are better predictors these days in my opinion.

This is what I think is happening. Sunday was the fifth anniversary of the stock market recovery that began on March 9, 2009. A multitude of individual investors have never stuck more than a toe back into the equity waters during this entire time. Meanwhile professionals and big money investors have made great profits.

Therefore whenever we see a pause or correction, more thousands of folks are buying in again even if only cautiously. As soon as the most recent rebound began on February 4, the rise was again dramatic and steady. My conclusion at this time is that any further correction will be measured and moderate. There are some sectors or industries that are becoming overheated, but a healthy rotation between sectors is also being evidenced.

One sign of strength has been that the fears of war in the Ukraine in the past few weeks have not had any marked negative effect on our stock indexes. At least the big money seems to be betting that the US and Europe will not launch into WWIII even if Russia completely stamps out the revolution for democracy. Since we have our hands full already and the administration is long on talk and short on follow through, I think that is a safe bet.

 

(All statistics from Worden Brothers, Inc., TeleChart Service, 2014.)

March 12th, 2014|Categories: Economy|