Significant Correction Ahead?

After a huge, government stoked rally, we find the market pausing and the volatility remaining high.

Although we've closed our last five trades in a row for gains, I was disappointed with our results last week.

We had some great set ups for long entries last Monday but the market gapped open above our limit prices and so we found ourselves not participating in last week's rally.

It's hard to be right but not be participating in spite of our recent gains which were:

GLL: +2.5%

USL: +14.6%

EWZ +7.4%

MOO: +3.5%

UYM: +15.2%

The View from 35,000 Feet

Recent fireworks in the market have propelled the major indexes into what could be new bull market territory.

March will likely go down as one of the top 20 best months in the history of the stock market going back to 1950 and generated the 3rd best monthly return in the past 58 years.

Of all the other top 20 best months, only three times did the market end up lower at the end of the year and so that could indicate the strong possibility that the worst is, in fact, behind us.

On the downside, more than $50 Trillion of US household wealth was lost in 2008 between the real estate and equity declines which could obviously dampen growth and earnings going forward.

And there is significant resistance right here at the 800-830 level on the S&P 500 as indicated on the Point and Figure Chart below.

Further drags on upside potential are 1^st quarter earnings and the future of the auto companies, not to mention the G20 meeting and the employment report this week.

Earlier this quarter, we saw panic selling as the markets made new lows and since this recent uptrend started, we've seen bouts of panic buying.

There are two kinds of fear; fear of loss with which we're all familiar and fear of being left behind which is the fear that was driving the markets this week and last.

We expect choppy prices ahead. Markets are very overbought and we expect a short term correction.

This week brings a slew of important economic reports that will influence where we go from here. Of particular note is the jobs report due on Friday.

The Week Ahead

Tuesday; January Home Prices, March Chicago Purchasing Manager Index, March Consumer Confidence

Wednesday: March ADP Employment Report, March Institute of Supply Management Report, February Construction Spending, February Pending Home Sales, March Auto Sales

Thursday: Weekly Jobless Claims; February Factory Orders

Friday: March Non Farm Payrolls

Hot sectors last week were Financials (XLF) Singapore (EWS) China (FXI) while lagging sectors were Agriculture (DBA), Japanese Yen, and Silver (SLV)

Position management and risk management remain paramount as we move into the second quarter.

I was in Kona, Hawaii, last week on Spring Break with my wife and young son and we went boogie boarding at Hapuna Beach which is rated one of the Top 10 beaches in the world. As my son and I rode the big waves, I realized that working in this market is much like surfing big waves. You try to catch the best waves but need to be constantly vigilant because the biggest waves are also the ones that can crush you without warning.

Disclosure: None

Comments

[Dave Wrixon:]

Wait until the real flight to safety begins when the World starts dumping dollars. That could result in a brief surge in the Dow which is after-all dollar denominated. But reality will soon set in. Ultimately, stock prices must be tied to Corporate Earnings.

Mar 31 03:21 AM

[SFO_DEAL:]

Dave, haven't European banks amassed a huge dollar shortage, due to reckless international expansion (per the Bank for International Settlements)? Do you ever wonder why the dollar screams higher every time this financial crisis takes another turn for the worse, despite the Fed's best efforts to contain the dollar? Maybe you should look at some facts, buddy before talking of your foolhardy inflationary brainstorms.

On Mar 31 03:21 AM Dave Wrixon wrote:

> Wait until the real flight to safety begins when the World starts
> dumping dollars. That could result in a brief surge in the Dow which
> is after-all dollar denominated. But reality will soon set in. Ultimately,
> stock prices must be tied to Corporate Earnings.

Mar 31 03:44 AM

[kelm:]

The volatility in virtually every market is at incredible levels. Look at the moves in the dollar recently and compare them with the daily moves prior to last July. Bonds and the dollar are driving commodities - which are also jumping all over. Stocks have rallied but need to pause. As for the latest dollar rebound - it looked to me like short covering in a very thin and fearful market. There are a lot of folks, myself included, who think the dollar is destined to go much lower but they have been burned every time they short by some event (ditto with Treasuries - rates are going up but the volatility will kill your shorts).

I think it will be interesting to see what comes out of the G20. I don't think this will be a run-of-the-mill meeting.

Mar 31 10:48 AM

[Larry House:]

To answer your title, which you didn't do--yes.

Mar 31 12:01 PM

[Old Trader:]

Cetin,

Do you, perchance, have anything to substantiate your assertion the correction is "over"? Personally, I'm waiting to see what the employment numbers coming out at week's end look like, what, if anything, comes out of the G20 meeting (given this a global situation), and how the Q1 earnings look like, as those come out before I start passing out the party hats and noisemakers.

Regarding the Q1 numbers, there's a chance they'll look "good", (or at least "less bad"), because the bar has been lowered, so some may beat "consensus", but that hardly makes them "good".

In regards to the G20 meeting, I think it unlikely that anything concrete will emerge, in terms of specific plans for dealing with things, which is what the market would need to "party on", while there's a VERY real chance, imho, that some of the actors involved may add to the chatter of replacing the US$ as the reserve currency with something else, whether that's an IMF SDR, or some other sort of basket of currencies. That's only helpful if one is long PMs and possibly oil/gas.

Alphabetically speaking, for the economy (and the market at large), I'm thinking an "L" or a VERY long "I_____I".


On Mar 31 02:16 PM Cetin Hakimoglu wrote:

> I disagree with your article. The correction ended yesterday. The
> markets are surging because we're still climbing the wall of worry.
> I recommend keep buying because the dow will end the year at around
> 10,500 on a steady rally to 14,000. i17.photobucket.com/al...
>
>
> i still believe in the v shaped economic & stock market recovery.

Mar 31 06:48 PM

[Marianthi:]

To answer your question, yes. Can't fight gravity forever...

Mar 31 07:33 PM

[ArkansasAngie:]

MSNBC says that the Treasury refused to testify before a Congressional oversight Panel -- "The job of managing the $700 bailout program is currently being performed by Treasury’s Neel Kashkari. Treasury declined the panel’s invitation to have him testify."

They want more power when they don't want to answer any questions now?

Nope! Treasury doesn't get that option. If they can bring in a dad gum general from the battlefield, Treasury can walk across town and report.

I don't know about you but I consider this a big deal.

Mar 31 09:40 PM

[ArkansasAngie:]

Bailed-out banks show auditors the money trail (www.msnbc.msn.com/id/2.../)

Apr 01 12:16 PM