Note: The following pertains only to the very short term (as in the next few weeks possibly, as far into the summer as August).
There is an increasing number of non confirmation signs emerging - both internal (Momentum and MACD) and external (index to index) - to suggest that the corrective phase is coming to an end. Key internal and external divergences along with an escalating amount of chatter re the need for a capitulation (bullish give up) to bring about the end of the correction are precisely the kind of data and investor sentiment one wants to hear at the end of a corrective phase. Moreover, the capitulation talk may turn out to be a false conclusion for the following reasons:
Capitulation presupposes that the correction we are experiencing will be followed by a resumption of the bull market. Given the fact that many other markets (and sectors) have or are in the process of breaking down on a longer term basis, a resumption of a bull market seems the least likely outcome. Rather, once a summer rally (driven by talk of cheap stocks and solid 2Q10 earnings results and fanciful dreams of sustained, organic economic growth) is out of the way, a bear market the likes of which could make the 2008-09 bear market look like a dress rehearsal seems to be the greater likelihood.
Hard To Sit On A One-legged Stool
The single leg supporting the current bull market stool is corporate profits. However, corporate profits are the end point of the macro economic, regulatory, and geo political environment. And, given the recent actions in each arena, corporate profits may not be enough to hold back the tidal wave of conflict and pain (economic and social) headed our way in the next few years. For proof one only need look back at all the optimistic economic and earnings views held in early 2008.
Since most traditional investors rely on conventional tools to make their forecast, often are bottom up oriented, and have precious little ability to quantify geo political, regulatory, and behavioral finance dynamics (which result in impacting the bottom line results of corporate profits), their optimism can be forgiven.
Investment Strategy Implications
Increasingly, the evidence suggests that the correction we are experiencing is within a larger distributional range that precedes a reversal of the bull market - beginning most likely before the end of the third quarter.
Today may be the day for a respite before the real pain and chaos. If it isn't, at 160 points below its April 23rd high (S&P 500, we are most likely quite close to end of the corrective phase. Those fortunate and/or wise enough to have avoided some of the pain since the spring high should consider putting capital back into the stock market - even if it is only for a likely feeble summer rally. It may the last chance to make money on the long side for a while.