Tuesday, February 11, 2014

One more low before March?

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.

[Excerpted from the Feb. 10 issue of Momentum Strategies Report]