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Today's Market WrapUp 02.22.2007 Mon Tue Wed Thu Fri Goldberg Archive Market
Behavior a Formula for Complacency
The rally in stocks since August has provided traders with every reason to be complacent. While there have been about 9 corrections in the S&P 500 since the summer, all of these corrections have been less than 2.3%. There was only one correction that has lasted more than one week and this was a 2-week 1.9% correction which took place toward the end of last year and beginning of this year. Therefore, it has not been profitable for traders to wait too long to buy dips, because the dips have been short in duration and minor in magnitude. While one can not rule out entirely the possibility of a “new era” where stocks continue to rise indefinitely without a significant pause or even a 3% correction, it would seem plausible that an actual and significant correction may be in the works soon. If and when this occurs, a long standing (since summer) market characteristic will have changed. However, if the market continues to grind higher, it could easily spur a phenomenon known as “capitulation” which will take the form of folks literally panic buying, thereby pushing the S&P 500 into a parabolic final crescendo. Such panic buying would not of course, be based on fundamentals or even rational technical analysis. Perhaps, the more accurate term for the final bullish parabolic move would be “crash-endo.” Below is the daily chart of the S&P 500 dating back to the beginning of the summer rally. Corrections are shown annotated at their beginning and end, along with the percentage correction (shown in red). Note the relatively low magnitude and short duration of each correction so far. At the present time (Wednesday evening), the S&P 500 is overbought near the top of its Bollinger band. While overbought, the latest rise from 1404 in early January has come on diminishing volume, as shown in the percentage volume oscillator (PVO) and the volume bars below the price. The latest price rise on diminishing volume suggests that another 1 to 2% correction is likely to occur soon. But, if the near term brings an accelerating price rise on increasing volume, a bullish parabolic crescendo is the most likely scenario in my view.
A correction toward 3% would signal a bearish change in the market’s character. The rationale of buying the 1-2% dip would likely be replaced with something more rational and consistent with the magnitudes and duration of actual corrections. This would result in a correction of at least 7% and lasting for a period of months. Finally, trends are to be respected, and the trend for the S&P 500 is up, with occasional 1% to 2% corrections lasting an average of about one week. Until there’s a change in character, the trend is what should be respected and traded. Today’s Market Major averages finished little changed today. The S&P 500 has spent five days going sideways and this represents a subtle recent change in market behavior. Volume today was also fairly unremarkable. A correction may be due to occur soon, but selling here would not be supported by enough bearish technical confirmation. If the S&P corrects about 1% tomorrow, considering the market trend toward mild and quick corrections, there would not be adequate risk to reward ratio to sell at that time either. As a result, the market grinds higher.
Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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