Thursday, February 24, 2011
... And that's what it feels like to hit an air pocket.
At yesterday's lows, the S&P 500 had dropped 40 points in just two days. All February's gains were wiped out. Mom and pop investors, who piled in last week at the highs, are now uncomfortably underwater.
The zero percent interest rate mom was making on her bank account is looking pretty good right about now.
"Don't worry," the financial network talking heads advise. "This is just a small correction in an ongoing bull market. Buy into any dips. After all, the Fed is on your side."
Pardon me, but isn't this the same advice the talking heads were giving bond buyers last September? (Bond prices are down about 15% from their September highs.)
Of course, it's too early to say with absolute certainty that stocks have peaked for the year. It is possible the talking heads are right this time, and the market will suffer only a minor correction of 5%-10% before recovering and making new highs. Somehow, though, I suspect it won't be quite so painless.
We've had too many technical indicators stretch too deep into overbought conditions for too long to expect this correction to be over within just a few days. Sure, stocks have been hit hard enough in the past couple days to warrant a brief oversold bounce. But anyone expecting an immediate recovery and rally to new highs is nuts.
Think about it...
Investor sentiment surveys (best used as contrary indicators) were showing the highest levels of bullishness ever. Last week, the volatility index (the "VIX"), a measure of fear in the market, hit its lowest level in four years. Short sales as a percentage of volume on the NYSE hit its lowest level in 10 years. My own mother was looking to put money to work in the stock market.
Those sorts of conditions don't correct themselves in just a few days and after a loss of only a few percentage points. We're headed for something bigger than that... Think 15%-20%. Something along the lines of the correction we saw last May through July. That was enough to shake the overly complacent bulls out of the market and create some bargain opportunities.
We're a long, long way from that right now.
The S&P 500 managed to bounce a little off the 1,300 level by the end of the day yesterday. It was enough to incite some "buy-on-the-dip" activity. But that will turn out to be a mistake.
This correction still has a way to go. Rather than buy the dips, I suggest you sell the rallies.
Best regards and good trading,
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