Market “Correction” Not Enough To Extend Rally

From the recent highs for stocks, we experienced a 7.25% drop for the Dow, a 6% decline for the S&P 500, and a 5.8% fall for the NASDAQ, the most significant part of which occurred last week, especially with Monday’s shock – the Dow dropping 326 points that day.  Since then, however, stocks have rebounded, although we are not at the previous all-time high levels as of yet.  The NASDAQ has turned positive for the year, although only just.  The S&P 500, which dropped about 108 points from the high, has rallied back to within 30 points of its high, and the Dow, which lost about 1,200 points, has gained back about half of its losses so far.

Investors are treating this recent fall in stock values as “the” correction, jumping back into the market on the buy side, driving prices right back up.  But is a 6% drop really a correction – is it enough to shake-out negativity and to foster further upside and a continuation of the current bull market trend?  I think not!

We witnessed stocks violating multiple technical support levels during the fall, with the S&P 500 breaking down through 1,800 and then through 1,775, which was the only real support on the chart.  The Dow also violated the 16,000 level, and it’s 50-day moving average.  In short, a bunch of technical damage has been done, regardless of the rebound.

Given current valuations, the length of the recover after the depth of the “Great Recession,” and the lingering negative economic conditions, not the least of which is the persistent, elevated unemployment rate and weak new jobs creation data, a 6% to 7% drop in stocks is simply not enough.

We need to see at least a 10% correction (and more likely 15% to 20%) before I would feel that the rally can be extended significantly.  Otherwise, without a more substantial correction, we will likely linger in a narrow trading range until either economic data improves dramatically, or we get a more significant correction.

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