Wednesday, June 06, 2007

On The Brink Of A Correction

After some sizeable down days in the market, it is teetering on the brink of a larger correction. Nothing is for certain (it's been to the brink and pulled back from that brink before), but the there have been numerous signs accumulating that the market's steep uptrend was due for a breather. (In fact a couple of sources I follow sold their holdings 2 to 4 weeks ago.) It just needed a trigger.

One immediate trigger last week was that New Zealand raised its interest rates. Of course they are a huge factor in the world economy (not!) but it was so unexpected that there was a knee-jerk reaction by traders apparently worried that it was a advance sign of interest rate hikes in more significant currencies, such as maybe the Euro and perhaps even the U.S. Dollar.

There has definitely been some damage done, and a number of sources are telling me their market analysis methods are giving sell signals in the intermediate time frame (an outlook of weeks rather than days). It's not unanimous, but enough to provoke more caution. Often in these cases the market will bounce around for a week or two before the trend either continues or reverses.

Here are a few representative things my sources are saying:
  • We could get another bounce. We are likely to see several days of consolidation and then another drop of about 5%.

  • Last week the Dow closed below the low of the high week of the uptrend. (In other words, two weeks ago the Dow reached its highest level of the trend. The low of that week was about 13,456. Last week we closed below that level). When this happens, it fires off a sell signal on a lot of "black box" institutional trading systems.

  • We have a majority of timing systems short. The preponderance of systems remain unmoved by the rally on Friday. You should at least consider standing on the side lines here even if you don't play the short side. That being said, we will have to watch some more to see what kind of correction we have going here.
By the way, one system I watch gave a sell signal on the S&P 500 and the Russell 2000 Thursday, but not on the Dow nor the Nasdaq 100. Even though those signals were so borderline that they were negated Friday, this is another indication that the large multinational companies seem to be doing better than their smaller brethren.

Labels: ,