Stocks continue to climb the wall of worry but even climbers stop to catch the breath. It's time that the market pause, pull back, and build up some steam again before moving significantly higher. I know you've probably already heard it this weekend but the market is overbought.
Look at some of these numbers. The RLX retail index and XAL airline index are up five weeks in a row. The banking indices are up four weeks in a row. The railroad index is up six weeks in a row. The BTK biotech index is up seven weeks in a row and up 22.8% since breaking out past the 1,000 level in February. The S&P 500 is up about 10% off its February low. The small cap Russell 2000 index is up 16.5% from its February low. These are impressive numbers. The trend is clearly higher but that doesn't mean we want to open new positions at current levels.
It is very encouraging that investors are shrugging off potentially negative news. The CPI inflation numbers out of China last week were higher than expected. The worry there is that rising inflation will force China to raise rates, which will slow down their economy, and thus slow down one of the world's biggest engines for growth. Fortunately, analysts wrote it off as a seasonal spike thanks to the Lunar New Year festival in February. Closer to home investors were happy to see a rise in February retail sales. The markets ignored the decline in March's preliminary consumer sentiment from 73.6 to 72.5.
I hate to be the bearer of bad news but eventually, and probably soon, stocks will reverse. You could say we've gone too far too fast. We need a little pull back before things overheat. The correction could be a couple of days or it could be a couple of weeks. The problem is we don't know what event will spark the sell-off. Volume has been slowing down as investors hesitate to chase stocks higher. Don't be frustrated when the short-term reversal finally hits. We can view it as an entry point. At this point traders are probably looking for any excuse to take profits, especially with the S&P 500 sitting at resistance near 1150.
This week we have a handful of events that could be used as a catalyst to sell. The biggest event is probably the FOMC meeting on Tuesday. Any odd comment or change in the Fed's stance would be a perfect excuse to hit the sell button. If that doesn't do it then traders could sell on the CPI, the PPI, the New York Empire Survey, or the Philly Fed survey, all of which come out this week. It really doesn't matter but readers should be expecting it. I suspect that any pull back will be short-lived. After options expiration this coming Friday money managers will be chasing performance as the first quarter comes to a close on March 31st.
I do have to warn you that there is a new rumor out that European leaders are planning another aid package for Greece. The country has been making headlines with tens of thousands protesting in the street over the budget cuts to reduce their debt. If there is an aid package announced, and the global markets decide they like the details, then Europe and the euro could rally. U.S. markets could rally as well with the dollar sliding, giving a boost to commodity prices. If this happens on Monday it could interrupt my expectations for a market correction or it might just delay it a day or two.
In summary, I remain bullish on the market but we need to see some sort of correction and odds are good it could happen this week assuming we don't see some global rally on another aid package for Greece. Wait for the correction to occur before launching new long-term LEAPS positions. Before I go, don't forget that this weekend is Daylight savings and we need to set our clocks forward one hour.
Chart of the S&P 500 Index:
Chart of the Russell 2000 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown