Why I’m Hoping for a Correction Soon

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On Friday, stocks rose from a low that resulted from a crescendo of selling on Thursday. While Thursday’s sell-off resulted from disappointing economic data, Friday’s buying came about from better-than-expected data. However, for the week, the S&P 500 registered a small decline.

Positive economic reports from Japan and China appeared to fuel some of the buying. Inflation in Japan rose for the first time in almost a year in March. And China is showing signs of modest growth in manufacturing and services sectors.

The energy sector rose, with Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) gaining 0.3% on Friday and up 1.1% for the week.

The Technology SPDR (ETF) (NYSEARCA:XLK) added 1.3% Friday despite a sell-off in LinkedIn Corp (NYSE:LNKD), which fell 18.6% following management’s cautious guidance. Other major technology stocks helped offset the loss. International Business Machines Corp. (NYSE:IBM), Apple Inc. (NASDAQ:AAPL), Oracle Corporation (NYSE:ORCL) and Intel Corporation (NASDAQ:INTC) gained between 1.4% and 3%.

Of the defensive stocks, Health Care SPDR (ETF) (NYSEARCA:XLV) rose 1.4% with Gilead Sciences, Inc. (NASDAQ:GILD) jumping 4.5% as profits soared on strong sales of its two key hepatitis C drugs. Management also raised their guidance for 2015 product sales by $2 billion.

Construction spending fell 0.6% in March versus estimates of a 0.4% gain. The ISM Manufacturing Index was unchanged for March at 51.5, while the consensus expectation was 52.

The University of Michigan Consumer Sentiment Index for April was 95.9, up from 93 in March, but slightly below forecasts. On Thursday, the Labor Department showed that first-time applicants for unemployment fell to the lowest level in 15 years.

Gold dropped 0.7% to $1,174.50 an ounce. Crude oil futures lost 0.8% at $59.15 a barrel. The euro fell 0.2% against the U.S. dollar, closing at $1.12.

At Friday’s close, the Dow Jones Industrial Average rose 184 points to 18,024, the S&P 500 gained 23 points at 2,108, the Nasdaq advanced 64 points to 5,005, and the Russell 2000 was up 8 points at 1,228.

The NYSE’s primary market traded 743 million shares with total volume of 3.4 billion. The Nasdaq crossed 1.8 billion shares. On both major exchanges, advancers outpaced decliners by 1.5-to-1.

For the week, the Dow fell 0.3%, the S&P 500 lost 0.4%, the Nasdaq was down 1.7%, and the Russell 2000 fell 3.1%.

IWM Chart
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Chart Key

The iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) has taken a stiff punch to the jaw, i.e., the intermediate support line at about $125. It also gapped under the 50-day moving average at $124, backed by two sell signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR).

High volume accompanied the break. However, with MACD now oversold, we could see a rally back to just under the 50-day moving average.

If the index can close back above the 50-day and the intermediate trendline, it is possible for it to reestablish the intermediate uptrend, but don’t count on it.

Dow Jones Industrial Average Chart
Click to Enlarge

Comparing the Dow Jones Industrial Average to the Russell 2000 is like comparing a Cadillac to a Ferrari. Both are fine automobiles, but one gives a comfortable ride at 70 mph while the other can hit over 200 mph with a thrill at every turn.

The Dow is like the Caddy, plodding along slow and boring and getting to where it’s going with relatively low risk. The Russell is the Ferrari, careening from one curve to the next with exciting volatility. This is a trader’s dream, as long as they are on the correct side of every transaction and every market turn.

Conclusion

Both indices are headed in the same direction — up. But, like the automobiles, they have different levels of risk. If you crash in the Ferrari at 200 mph, it is unlikely that you will survive. But at 70 mph, the driver in a well-fitted Caddy has a better chance.

For those who have everything invested in the Russell 2000, it is unlikely that they can predict every turn of the market and survive, while even with a fully weighted investment in the Dow you could survive a crash and even be profitable at the end of the year. Consider that even in the “Flash Crash” of May 6, 2010, when the Dow plunged 998.5 points (9%) in 36 minutes, those who held onto Dow stocks regained all of their losses and ended the year with a profit.

In this very volatile year, I’ve refrained from predicting a final closing number for each major index. This is because of the special circumstances confronting investors: all indices suffered a loss in January, it is the seventh year of a presidential term, and interest rates are still at an unprecedented zero percent.

The major indices closed down for the first month of the year, and according to the “January Effect,” when this occurs what follows is either the continuation of a bear market, a 10% correction or a flat year. According to the Stock Trader’s Almanac, since 1950, this indicator has been accurate 89.1% of the time, with just seven major errors in 64 years. And down Januarys were followed by declines that averaged -13.9%. But each decline has also provided investors with an excellent buying opportunity.

This year, January’s Dow loss of 658.12 points triggered the indicator. But the sooner we see a correction, the better, since it takes time to recover from a 13%-plus correction.

My guess is that we will see a correction before the end of the summer, and if it occurs before July we will regain all losses and close unchanged. However, a correction with less than six months to retrace a loss will be difficult to overcome, and we will likely close the year at a slight loss.

I plan to discuss two other special circumstances and their impact on investments later this week.

Today’s Trading Landscape

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

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


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/daily-market-outlook-why-im-hoping-for-a-correction-soon/.

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