Out of Hibernation

After a 25% move in the broad indices since mid '06, it looks like the bears might finally leave a footprint. The major indices, specifically the S&P 500 and Dow 30, have not had a significant correction of 10% or greater since the bears ran the show in 2002. Marketeers consider corrections within bull markets healthy and constructive. For the trader and investor a correction should be looked at as an opportunity to buy good stocks at lower prices , presenting more favorable risk/reward scenarios. Historical corrections within bull markets can be up to 10%. If we were to see 10% lower prices in the near-term the uniformed and novice trader might get a little spooked. A correction of that magnitude would put the S&P 500 in the 1,386 range.

Friday June 8, closed out one of the worst weeks seen since the dubbed "Shanghai Surprise" experienced in late February. The S&P closed down just about 2.5% for the week. Thursday saw the most blood, closing at the low, with a 1.8% decline. An important factor on the day was increased volume, the NYSE trading a whopping 1.9 billion shares which is significantly higher than the 1 month average of 1.53 billion. Amazingly, 1.9 billion shares equals a dollar volume amount of $82.6 billion traded in just one day - I'll take just a little bit of that, please!

An almighty test is looming next week. The 50 day moving average (dma) is one of the most followed technical indicators on the globe. As you can see from the chart below the major averages are hovering right at the 50 dma. This should act as some sort of support, but for how long nobody knows. If prices were to break the 50 dma, we could only assume a possible next target would be the 200 dma (the other most followed technical indicator on the globe).


Don't forget that the trends of these averages are upward sloping which should lead us to believe that short-term lower prices is an opportunity to pick up good stocks on "sale". There are good reasons to be bullish in the current time including global economic growth and massive M&A action. Always, economic conditions can change, but if it gets real bloody on the street and everybody is running for the hills we should be looking to back up the truck.