I’ve
been asked if the upcoming Feb. 21 cycle event could be a catalyst for a lower
low in the S&P. Evidently there are
more than a few respected market analysts who are predicting at least one more
low by late February before the market’s next rally phase begins. While a move below the Feb. 3 low is possible
between now and Feb. 21, my best guess at this point is that the Feb. 3 low
will hold as the correction low.
There
are some compelling reasons for holding this opinion. For starters, several technical indicators
reflected a completely sold out internal condition as of last week. Unless the S&P price oscillators, for instance,
move very quickly back into “overbought” territory, the oversold condition created
by last week’s low is likely to last through the Feb. 21 cycle event.
Another
compelling reason for suspecting the Feb. 3 low in the S&P is the low for
this correction can be seen in the dramatic performance of the dominant
intermediate-term momentum indicator for the NYSE. This important measure of internal momentum
has been running hot in the last few days, even as other components of the NYSE
hi-lo momentum (HILMO) index have lagged.
Granted, a fully healthy market requires more than just this indicator
trending higher but this indicator is important enough that it could keep the
market above the Feb. 3 price low by itself.
Another
factor which points to the Feb. 3 bottom as being the pivotal low is the
possibility that the January decline was overdone. That is, the decline may have been more of an
emotionally-driven reaction to poor earnings reports, fears of a China economic
crisis, etc. In view of the fact that
the Dow Jones Corporate Bond Index never pulled back during the January stock
market correction, this view has some credence.
Check out the DJ corporate bond chart below. There’s saying on Wall Street that when
corporate bonds are trending higher while stocks are trending lower, the
direction of bond prices usually wins out.
If this relationship holds true then we can expect stocks to stay above
the Feb. 3 price low and either mark time until the Feb. 21 cycle event or else
push gradually higher.
