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Stocks hit the top of the channel again; a 5% correction would be business as usual here

posted on December 2, 2009 at 6:55 pm
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Here we go again.

For all the ups and downs; the crisis scares and the crisis solutions; the good numbers and the bad numbers; this stock market is still moving up.

But instead of running up by leaps and bounds, it’s now inching up. Each time it rallies it manages to push the top of the range up just a few points before it sinks toward the bottom of the range where it sets a slightly higher low.

Let me show you what I mean on the Standard & Poor’s 500 Stock Index.

On September 16, the index hit a temporary high at 1069 and then fell back to 1025 on October 2.

On October 19 the index managed to climb to 1098 and then fell back to 1036.

On November 16 the index made a new high at 1109. And it matched that high today at 1109.24. If the pattern holds investors should expect the index to now move from the top of the channel toward the bottom at, roughly, 1070.

That would continue the pattern of higher highs and lower lows, indeed. But stocks are only making these gains after a battle. We’re talking about a move of just 45 points on the low side and 41 points on the high end since September 16.

(You can draw your own channel lines using the charting tools at Stockcharts.com or as use the chartgs on the site of my partner MSN Money. I’ve used a technical analysis tool called Bollinger Bands to define the channel. John Bollinger, the inventor of Bollinger Bands has his own website that explains his tool at http://www.bollingerbands.com/  )

It’s not just the S&P 500 that’s following this pattern. You can see it in the Dow Jones Industrial Average since August as well. The Dow Industrials, like the S&P 500, looks like it may have stalled again at the top of its channel today.

What does all this mean to you? (Me. Me. Me. It’s always Me, isn’t it?)

I think the odds are pretty good that we’ll now see a minor reversal that would consolidate recent gains. And set the stage for another attack on a slightly higher high at the top of the channel.

In other words, if we get a move back to something like 1070 on the S&P or 10,006 on the Dow it doesn’t mark the beginning of some big change in the market and you don’t need to panic and head for the hills. (Although it does mean, if you have something to sell you should do it now or be prepared to wait for the next top in the channel. And, of course, by at the bottom of the channel, if you get a chance.)

That kind of decline is just business as usual. It would be a drop of 3.6% on the S&P 500 and 4.3% on the Dow Industrials. Exactly the kind of mini-correction (5% and not the standard 10% correction) that we’ve had in this rally.

If the market goes down through those levels, like a hot knife through butter, then we’d be looking at a very different scenario, of course. But, as I’ll explain on Friday I don’t expect that to be a real danger until March or April of 2010.

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  • robert1234 on 2 December 2009

    I wish I has somthing to say here, but I don’t.

    I read in Business Week, that the S&P 500 is valued at 27. That is almost double what is considered a safe value of 15.

    The Fed printing machine spins….. the market goes up. Higher and higher into the sky.

    If I invest,, (in anything !) I am buying into a giant bubble of madness. If I dont, I am holding devaluing bubble of dollars, and that is …. madness.

    So everyday, I sit here, watching, ….half in the market, and half out.

  • terryw on 3 December 2009

    I think if we do have a correction and gets on a 5th wave uptrend then it’d be very strong indicator that we have entered a bull market.

  • terryw on 3 December 2009

    of course, fundamentals are saying stock prices are over extended at the same time :) And the dollar carry trade has to unwind eventually.. Like Jim said… when fundamentals are all out of the door, and the market goes up. You don’t just run and hide, you said thank you while being diligent and careful.. until the stuff hits the fan and the world ends in 2012 :p

  • grindy2424 on 3 December 2009

    A bit of a side note….. BGC has been getting pounded lately and is trading at around $28.00. I see it as a pretty good time to jump in long term. Do you agree Jim?

  • doydum on 3 December 2009

    RSI chart for SPY does not indicate an over-bought condition as on September 14 or October 12. We are currently in the middle of the upper half. Any idea?…

  • Amos on 3 December 2009

    I see Paul Krugman is now worried worried about a double dip recession. Whatever you may think of his politics, he is a pretty good economist.


  • Gerarddm on 3 December 2009

    A well known Elliot Wave theorist has publicly opined that a dollar rally is imminent, which means a strong stock market slide. Maybe, but when? We shall see…

  • sliman on 3 December 2009

    Krugman’s answer is to run BIGGER deficits. He is a real genius!!!!!!!!

  • twoyrfixed on 3 December 2009

    I think you said a lot with very few words in your second to last paragraph. I wonder if Jim could comment on his blog as this seems to be the most obvious dilemna facing investors?

  • Jim Jubak on 3 December 2009

    Robert, I don’t see a bubble. The PE on the S*P should be elevated now because we’ve had a huge rally in anticipation of an economic recovery. The market is ony in trouble that rally doesn’t materialize. This is pretty much business as usual off an economic bottom. My concern isn’t that we’re looking at a bubble but that we’rfe looking at a signficiant pull back (bubbles burst and every collapses and I don’t think that’s in the cards) if the economy doesn’t growth at 3% or better in 2010.The odds for a disappointment are pretty high. Look at the calendar. I think we’ll know what the 2010 economy will look like in April 2010 after first quartger GDP. If you can’t sleep at night, take your gains (and you can take just some of them) and wait it out. The worst that’s likely to happen is that you’ll have to buy back in at 10% or so higher prices. This market isn’t for everyone right now.

  • Jim Jubak on 3 December 2009

    Gerarddm, I don’t pretend to follow wave theory, but a stronger dollar would indeed mean lower stock prices. I don’t have trouble seeing the dollar rally on an over-sold bounce but I’ve got trouible seeing a big dollar rally while the U.S. is so far behind the rest of the world on raising interest rates.

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