Since the bottom of the last Bear Market move in March of 2009, the stock market has experienced various corrections. Generally, there have been market corrections of 7-10% on multiple occasions. Markets have a tendency of repeating themselves in terms of technical patterns. Corrections are needed to reset “market mood”, so the market can move higher. At times, markets can break down over a long period of time (we have seen 2 such breakdowns – one in 2000-2002 and another in 2007-2009). Those were marked by a severe break in consumer “mood”. It has been said that bull markets “climb the wall of worry”. From this technician’s chair, the “wall of worry” has been present this entire market rally since the 2009 bottom (Greece, Spain, Iran, US and world debt, oil prices, real unemployment, war, etc.) There is plenty of worry out there. Trying to make prudent decisions on clients’ wealth is no easy task. You have to do your best to study market trends and economic statistics, and understand the gravity of those “worries”. Many people, including me, underestimated the gravity of the housing boom in 2003-2007, and what it would mean when it “busts”. The markets were continuing to move higher as the housing market started to deteriorate. Eventually, the market priced in the largest correction since 1929-1933.
Where are we now? A normal correction for this market would technically take the SP500 to the 1300-1340 range, so that would mean it is almost done. This would also mean we should see a decent rally in the months of June/July. If the market breaches 1300 and/or we don’t get a decent rally in June or July, this technician would start to get concerned that the Europe worries (as well as the rest on the list above) are starting to put an end to this bull market. I do not see the signs pointing to that scenario yet. I do not think the outlook for equities over the next 4 years is favorable, but the 2012 market has yet to show a long term technical “crack”. So look for the market to take a stab at 13,500 on the DOW this summer and possibly 14,000 by year end. We are continuing to be cautious in the market, buying only companies with superior debt and earnings fundamentals. IF there is a technical “crack” of significance, I will quickly update the technical picture.
What could stimulate the market out of the current doldrums it is experiencing is hard to predict, however the Facebook IPO next week could ignite a new appetite for risk. The most recent IPO that I can remember having as much hype was Google. Google stock has done well over the past few years, but during the IPO week it bounced 10-20% up and down over the course of the week. “Getting in” at the right time was challenging and very speculative, but, in the long run, it has been favorable for investors. How well Facebook will fare as a stock is unclear; however, if the stock comes out “hot”, it is reasonable to say that the market could grab that upward momentum to 13,000 by the end of May and try to capture 13,500 in the summer on its way to 14,000 by the end of the year. If the market remains dull and down in the summer (like the last few summers), it could mean that continued stock gains will be hampered over the next year. We will report our analysis if this technical scenario presents itself.