Brian Jackson
Inside the Market readers may recall a recent post in which technical analysis by the folks at Phases & Cycles suggested a late-January correction was in store for the S&P 500.
What actually occurred was a 100 point drop in the index – not a reason to celebrate, but certainly nothing that fits the term "correction".
Since then, the markets have roared back, with the S&P closing at a record high of 1,873.91 on Tuesday. So how does this fit into the analysis by Ron Meisels and David Tippin?
"As 2014 began we maintained that the strength of the 2013 markets required at least a minor correction to enable a healthy bull market," they write in their latest market analysis. "And in our market comment at the beginning of February we suggested that the corrective phase was probably not yet over and that it would be prudent to be patient and let the correction run its full course."
The analysts now see three possible scenarios:
1. The correction is over and more new highs are imminent
For any technical observer, the existence of new highs is a bullish signal. However, Messrs. Meisels and Tippin say the problem with this view is that internal momentum indicators are weakening, and the markets are short-term overbought.
2. The final stage of the correction has yet to occur
The recent pullback occurred in two phases in late January and early February, and was relatively minor. The S&P 500 only retraced one-third of its previous advance and the TSX kissed its 50-day moving average. The final phase – should it come – would see indexes test the support of the late January/early February lows, and possibly fall past their respective 200-day moving averages.
3. The correction moves sideways, not down
This scenario – deemed most likely by the authors – would see markets moving in a choppy sideways fashion with a low (but not a new low) near the next important cycle maturation between the end of March and the middle of April.
They end their market outlook with a warning for bulls:
"In sum, marginal new highs at the end of February, if not followed through immediately, could be a short-term trap for the bulls. We think the correction has more room to run and chasing the markets at this point is high risk. A new buying opportunity should appear as spring approaches."
You can read the entire report here.