So this week has been pretty instrumental and telling...maybe. I mean, we all know these market trends can go lasting a week or can be major corrections due to underlying fundamentals. So, first - what's happened this week, and second - is it a minor pullback, a sideways movement or the start of what some anticipate to be a major correction?
First - What happened?
The week is far from over but so far we've seen a few points of interest emerge.
(1) The S&P 500 broke through a resistence and technical level of 1020 and managed to live in the middle 1025 range for Monday through Wednesday. This opened the door to runs up to slightly below 1075 possibly.
(2) All three days of this week saw flip-flopping in the market. Monday and Tuesday in particular the markets had some serious upward movements going and then just fell off the cliff and finished mostly unchanged for the days.
(3) The economic reports this week have been extremely postive; home sales, jobless claims, GDP revisions and even the bond auctions have either gone according to expectations or rapidly exceeded them; and again, the market failed to move higher.
(4) Thursday has started with a sharp fall off, but most notably this fall off has taken the S&P 500 back below its 1020 level into the heavy resistence and turmoil of the 1007-1020 range; re-escaping that could be hard IF the S&P 500 should close below 1020 today.
(5) You have the end of the summer and FINALLY the sentiment that maybe, just maybe, this rally is over. That all the priced-in optimism has finally...well, been priced in and now the market reflects reality? Maybe, at the best case scenario. Worst case scenario, the market is over-valued or the reality of a recovery isn't actually reality. Either way, rallys following large falls tend to peak out at certain levels...23%, 38%, or 50% recoveries... we're right at the 50% recovery rally point.
Second - Whats this mean?
Well, I think my opinion is clear - that the market is overvalued and not reflective of the current economy. I think a pullback is necessary, but do I think that this is the major correction that we need or is maybe deserved? No, not really. I think that we could certainly see a pull-back...maybe back to the 975 range on the S&P 500. I think the market could go sideways for awhile and maybe even rally again in the next quarter. I don't think a real correction happens until middle 2010 - and even that isn't for sure. But I think that it'll be too hard for the fed to know when to raise rates appropriately, that oil may continue to rise and impose a tax-like effect on consumers, that consumers will continue to restrain their spending into 2011, that job creation won't return until middle to late 2010, and that the positive economic reports for many industries (housing, autos, banking) have been the result of short-term, short-lived economic stimulus.
The one caveat I'll throw into all of this is that if we don't see GDP growth in the 3Q or 2009 and if unemployment doesn't begin to at least moderate in the next month, then you could have a real exposure that the economy is much worse than expected and that the recent rally was built on (fundamentally) flawed assumptions of recovery and regrowth. Those events, which would pan out in about 2 months from now would be the catalyst for a major correction now, as oppposed to one in 2010.
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