We Have a Correction
by Paul J. Nolte, CFA
May 24, 2010
It is official; we have a correction. The goings on ‘over there” are trumping anything that is happening here, from at least okay economic data to the wind down of a decent earnings season. In what has been the largest decline since the beginning of the market rally higher, calls for new market lows and a return to the near collapse of the financial system are a bit overblown. What is certain is that some wind has been let out of the markets and could in fact allow for a sharp, albeit short rally in stocks. The economic data will be plenty this week, from existing home sales (a small bump expected) to consumer income and spending (spending a bit below income). What hasn’t changed is the debt situation, from Greece to your neighbor down the street, the ability to service debt is beginning to take center stage. Initial hopes of “spending to prosperity” have been dashed and now come the payments. Greece can no longer print currency (as we can) and is holding the European currency and community hostage. The debt problem is a long way from being solved and is likely to keep market gains under wraps for quite some time.
To partially quote Mae West: when I’m bad, I’m better. So take heart that things are looking pretty bad, but they are setting up pretty good. For example, the net declining volume over the past five weeks has buried advancing volume, with only two other times being worse, October ’08 and March ’09. The same is true about the number of declining compared to advancing stocks. Also of modest interest, meaning only that the markets are very volatile on both advancing and declining days: for the first time in over 20 years of data, the last three weeks have seen one week of better than 5 to 1 advancing to declining stocks sandwiched between two weeks of 5 to 1 declining to advancing stocks. Significance? None yet, but normally one really bad week has been followed by a couple of decent weeks – again with the exception of late ’08, early ’09. Given “normal” markets, we could expect a decent couple of week’s worth of good markets, at which time we’ll have to see where things are before making any long-term judgments. One other note with the market decline, if the SP500 holds around the current level through this week, it will mark the first time since December ’07 that it crossed and closed below the 10 month average, which it stayed below until June ’09. Certainly lots to watch this week.
© 2010 Paul J. Nolte, CFA
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.