Is the Correction Camp Too Crowded?
We posted yesterday that the S&P500 was set up for a pullback after carving out an outside day (higher high and lower low than previous day) at strong resistance and looked for follow through selling today. Didn’t happen.
In fact, the S&P500 followed yesterday’s outside day with an inside day with today’s high/low lower/higher than yesterday’s. This reflects a lack of sellers and nervous buyers.
An inside day following an outside day is a relatively rare three-day pattern and has initially happened on six times since the current bull market began on March 6, 2009. In every case, the post 5-day return on the S&P500 was positive, averaging 2.08 percent.
Today’s pattern and run up looks very similar to the one made on January 31, 2011. The S&P500 rallied 22 percent in 108 trading days from the August 26, 2010 low into the inside/outside three-day pattern. It added another 4.4 percent in the next 14 trading days before correcting.
As of today’s close, the S&P500 is up 25 percent in the 1o3 trading days since the October 4th low. The market does feel like it lacks sellers and needs a real catalyst to knock it down, in our opinion. Interestingly, there are 13 trading days to the March 20th Greek bond maturity, which could suffer complications and provide the catalyst for a global equity correction.
Like many — maybe too many – we remain cautious and do look for a pullback after such a big move but do respect the trend and history.
Good luck out there!
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March 2nd, 2012 at 7:57 am
I am sorry, I just can’t believe you are serious. How can you convince me that these “inside/outside” patterns are anything but mere randomness and noise? I am going to read the stars now and know when the end of the world is coming.
March 2nd, 2012 at 9:05 am
Silly — it’s the tea leaves and goat entrails; not stars! Get your technical indicators right, man! ;-)
March 2nd, 2012 at 9:05 am
Not to sound like a broken record, but stocks are going up because of massive indirect liquidity injections by central banks. And now it would appear – with Israel’s central bank the latest to authorize direct stock purchases with reserves – central banks are cutting out the middle man and buying stocks direclty. How could stocks do anything but go up in this environment? There are massive new sources of demand, and potential sources of selling have no reason to sell given all the captive buyers (even despite the ridiculous valuations that abound at these levels – I’m looking at you IBM and your negative tangible book value trading at $200/share – LOL!)
March 2nd, 2012 at 9:59 am
“PullBack” the new Kama Sutra!