Where Will The Correction Take Us?

Let’s be clear that nothing fundamentally has changed.  The Fed is going to leave rates low for a while and they will keep buying various bonds to keep long-term rates low as well.  The economy has stabilized and in fact is growing.  The positive economic surprises will continue as leading indicators are still improving.  But, technically, have things changed?  Not yet.  But, the technicians saw an outside reversal day where we went to new highs and reversed to new lows (and on stronger volume).  Definitely something to watch but it’s only one day.

You can see on the chart below of the S&P 500 that if we stay in the uptrend we’ve been in for some time, a likely correction could be to the 1010 level.  That would be approximately a 6% correction from yesterday’s highs.

spx 9 24 09

Corrections happen even in good markets and they can start at any point.  You’re more than welcome to try to trade them but just be careful that this is still a very strong market.


4 Responses to “Where Will The Correction Take Us?”

  1. 1 MJS September 24, 2009 at 10:43 am


    Bill King points out that the “LEI, which has increased for five straight months, is heavily weighted to monetary indicators and the stock market. Its predictive value for the stock market has been poor due to over-used monetary stimulus.”

    The LEI trended lower from 1997 to 2000 as US stocks bubbled. It declined from 2004 to 2008 as the monetary medication carried a diminishing effect on the real economy.

    Economist Dr. Michael Hudson notes a related pet peeve: We’re in a phase change where the economic relationships, proportions, leads and lags do not operate as they did in the past. So any mathematical model that’s based on this sequence is going to be junk mathematics. The last time we had junk mathematics we had the big financial crises that we’re bailing out today.


    • 2 keggerss September 24, 2009 at 10:48 am

      The LEI might be a bad indicator. I use a proprietary model of leading indicators which have been extremely correlated and accurate. Obviously, there is no one indicator that works all the time. This isn’t a science. But, the term LEI is general. Everybody has their own formula and what goes in to it. Many economists have been far too negative on this economy and thus the stock market.

  2. 3 Steve Schmidt September 25, 2009 at 4:49 am

    You mention 1010 as support. Volume has ticked up a bit and the trend seems down or sideways. 3Q may be ok with fresh money wanting to get in before the quarter ends, but starting in Oct (4thQ) many may want to start taking profits for their year end balance sheets to at least show some positive numbers. We live in interesting time, for sure.

    • 4 keggerss September 25, 2009 at 6:22 am

      Steve, You are correct about the 4th qtr but as I’ve been saying on the air, if the market moves up, the pressure to get invested will be too high. I wouldn’t be surprised to see a sell off any time between now & early October, but I still expect the markets to move up through the end of the year. Many of the indicators I watch that usually turn down 4-6 months in advance of a major top haven’t peaked yet. But, your theory makes sense and it’s something I’ll definitely be paying attention to.

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