Correction Everyone Expects Is Not Likely to Occur

by Sam Collins | January 3, 2014 2:44 am

Correction Everyone Expects Is Not Likely to Occur

For the first time since 2008, the major indices started a year with a decline as profit-taking hit many of last year’s strongest stocks. The Dow fell 0.8%, the S&P 500 lost 0.9%, and the Nasdaq was off 0.8%. But investors have benefitted from the big gains of 2013, which was the best year for stocks since 1997.

There were several significant pieces of economic news. Initial jobless claims fell to 339,000, while analysts had been expecting a slight rise to 345,000. The Institute for Supply Management’s purchasing index for December fell to 57 from 57.3. Economists had expected a decline to 56.8. And construction spending in November came in above expectations with an increase of 1% where 0.8% was expected.

At the close, the Dow Jones Industrial Average was down 135 points to 16,441, the S&P 500 fell 16 points to 1,832, and the Nasdaq dropped 34 points to 4,143. The NYSE traded a total of 3 billion shares, and the Nasdaq crossed 1.7 billion. On both major exchanges, decliners were ahead of advancers by about 1.8-to-1.

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In December, the S&P 500 jumped 2.4%, making new highs almost every other day as the index increased its angle of advance (see the S&P 500 weekly chart from Dec. 31[1]) and drove to an astounding 16.7% premium over its 17-month moving average. Prior tops in 2000 and 2007 rolled over after achieving premiums above 8%, but the buyers have run the current bull market to almost twice that premium.

Facts to consider: Corrections of 10%-20% are common, and yet we haven’t had a significant correction in over three years. Thursday marked the first negative opening day since January 2008. In the past 39 years, if the first five days of January gained, the market advanced in 33 of those years (85% of the time). And the “January Barometer,” i.e., so goes January so goes the year, has been accurate 88% of the time since 1950, according to CNBC.

Conclusion: The stock market appears to pure chartists to be very overbought and due for a correction. However, momentum is strongly bullish, our internal indicators are not as overbought as in May, April or September (when the market had minor pullbacks), and the latest reading from the AAII sentiment survey indicates that the public’s bullishness is decreasing, falling from 55% on Dec. 26 to 43% on Jan. 2 — the biggest drop of the year.

In a highly volatile market in which traders and investors alike expect a correction, the chances are high that it will not occur. Corrections of 8% or more usually happen when investors least expect it.

By monitoring the performance of the indices during the first five days of January and then the full month, we will be able to better position ourselves for the full year. Be cautiously bullish. Only buy into dips and keep your stop-loss orders intact.

Next week, when the institutional traders arrive from vacation, the sparks are bound to fly as they position themselves for the first half of 2014.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

Endnotes:
  1. see the S&P 500 weekly chart from Dec. 31: http://investorplace.com/2013/12/daily-stock-market-news-2013-charts-year-review/
  2. click here: http://www.bloomberg.com/apps/ecal?c=US
  3. click here: http://www.bloomberg.com/markets/economic-calendar/

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