Market Analysis: DOW Breaches 17,500; is This a Warning of Things to Come?

For the second time in the past 12 months, the stock market has corrected through what I feel are key levels in seeing a continuation of the bull market.  Last October, the market had a quick 9.8% correction.  During that time, I indicated that investors needed to see a strong rally in November/December to keep the bull market going higher.  If the market did not see a strong rally, it would be considered a “Dead Cat” bounce, and it would be a time to reduce risk (see blog release dated October 16, 2014).  The conclusion of that correction saw a strong rally into the end of the year reaching my DOW target of 18,000, and the market remained in an upward bias.

Today I see a similar situation.  The market has gone through an eight month period of rallies and corrections that have resulted in a zero return, with the exception of the past week.  Returns for 2015 have not turned negative.  This year, every time the market appears to start to rally, Greece, China, etc. cause it to pause and retreat.   Being that we are in our sixth year of this bull market, investors generally should be a little cautious.  This is the third longest bull market in US history without a 25% correction (typically a bear market is defined by a 25% correction or greater).   The market during the past two weeks has been very weak with news out of China, and this could be a warning to investors.    Typically selling equities in times of corrections proves to be a wrong decision in the long term.  Historically, the market takes time to turn from bullish to bearish.  The next two months are pivotal to keeping the bull market going.   I will be looking for the stock market to rally in September and October.  If the market does not see strong buying over the next two months, there is a strong possibility that my view of the overall health of the stock market will change.   In conclusion, the structure of this bull market is still intact, however the recent selling is concerning.  Patience is required during these times as an investor.  The next two months are very important to keeping this historical bull market moving forward.