On Monday, the Dow soared a mind-blowing 235 points. That translates to a whopping one day surge of 2.8%. Meanwhile, the broader S&P 500 jumped even higher: 3.1% to 910. And as we write this today the Dow is up another 100 points and the S&P another 15.
So, why would we be talking about pull-backs?
The fact is the market is long over-due for a correction in the 10% plus range. And this week's bullish action doesn't change that outlook one iota. See for yourself...
As you can see from this daily chart of the S&P 500 -- a good proxy for the broader U.S. stock market -- the market took significant heat last week. In fact, from a high of 923 to a low of 879, U.S. shares lost a staggering 4.8%.
Now, if you compare last week's open on Monday at to its close on Friday, the market shed just 3.4%. And Friday's close was certainly off the weekly low, another positive for sure. But no matter how you slice it, last week's action certainly falls into the pull-back category.
And the way we see it, we couldn't be happier.
The fact is no market goes straight up. And if it does, red flags should go up like mad: The correction will likely be a lot bigger than the one we had to swallow last week.
The fact is any investor or trader that's been around the block a time or two welcomes these kinds of relatively gentle corrections. They're a clear sign people are taking profits, a big plus no matter how you slice it. Plus, they drive down share prices a bit so that new investors can get excited about the market and throw some money on the table. After all, no one really likes chasing a surging market.
So, where do we go from here? Technically, we have two scenarios...
Our first view is a bit more bearish. Take a gander at the dotted red line on the chart. That's near-term support in the 825 area. From last Friday's close, that would represent a 6.6% pull-back. Add that to the 4.8% we took off last week and, all told, we're at an 11% correction.
Now, this kind of pull-back -- at this strength -- wouldn't make us lose one wink of sleep. Don't forget: From a low of 667 on March 6th to a high of 930 on May 8th, the market has skyrocketed 39%. So, a 10% correction plus is certainly nothing to cry about.
Our second scenario is a bit more bullish. The next pull-back could be to the 847 area. That's a fairly near-term support level.
Now, we could be wrong on both counts and the market could jump off last week's low of 879 and continue its bull-run that began in early March. While that's not exactly as much correction as we'd like to see, it's certainly in the cards. And the action so far this week certainly backs up this outlook.
And don't forget: Now's certainly not the time to try to navigate these turbulent markets on your own. That's why we urge you to take a look at our investment newsletter products. They're chock-full of investment ideas suited for just about any budget and investor. You can learn more here: http://www.optionchronicle.com/index.php?option=com_content&task=view&id=127&Itemid=265.
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Hallaman Market Research
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