July 20th, 2006

Correction and Consolidation Not Yet Over

I’m back in Martha’s Vineyard as I was last year (see my August 7, 2005 post). My granddaughter, now 14 months old, is coming up again this weekend with her parents. There hasn’t been much to write about … until today, that is. Over the past couple of weeks,

  • A new Mid-East War has broken out with Israel bombing southern Lebanon and
    Hezbollah lobbing missles over the border into northern Israel, one having hit Haifa.
  • At the same time, oil prices are relatively stable while energy stocks one day look like their going to crack and the next look like their going to skyrocket.
  • One day the markets break down through previous support levels and the next they bounce up on good volume.
  • This is the middle of July and what that means is that, since 1980, 61.5% of the time, more than any other of the the “sell-May” months of May-October, July has been down and it’s been down 2.4% (although that’s less than August and September because of major declines in some years in those months). For a complete monthly analysis, see my May 15 posting, “Major Stock Market Correction in the Offing?”
  • Bernanke has continued to raise interest rates (producing great angst among economists that the Fed may be tightening the screws too much and leading the economy into recession. But each increase assures the market we’re in a strong economy with good earnings. One school of thought, however, is that the end of interest increases signals a decline in the market within a quarter or two.

You would have expected that with all that, there might have been some clear direction. But there hasn’t been.

So for the past several weeks, I’ve been working on trying to construct an metric, an indicator, that shows when market breadth (advance-decline shares and volumes) and movement were building sufficient momentum to indicate the end of the correction that began in early May.

Since June 15, a month ago, there have been 3 days of over 2% increases each and yet the index is no higher than it was on June 15. So there’s been much spinning of wheels. With the exception of Jim Cramer, who introduced an extra dressed in a stupid bull costume, most talking heads believe that a market turn hasn’t yet been achieved. It almost sounds un-American but I hope not because I still have a fairly large short position.

The indicator I’m working on, although still premature, currently shows patterns similar to what it looked as it did Nov, 2002-April, 2003 and March, 2005-Nov, 2005. Both were consolidation periods which extended 5-6 months and were followed by extended growth. It may happen here but probably have a couple of months yet to put up with.

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  • Anonymous

    The utility average is at or near all time highs and that’s bullish. I think the market will rally shortly. It got beat up bad since 5/11. Many company’s announcing buybacks. It’s a good time to bottom fish.