February 19, 2014

Market could still have a big correction

I suspect that a correction far greater than those experienced in recent years is in the offing sometime this year.

Typically stock market oversold rallies last about five to eight days. A healthy recovery off of lows is usually characterized by put buying (persistent skepticism), expanding volume (indicating that the real buyers are back) and good breadth.

That said, I continue to see a trend change in the markets -- and not for the better.

The technical damage in 2014 has been more significant than in any previous corrections.  The percentage of S&P stocks that were above their 200-day moving averages has also declined from 90% to 65% and has broken a trend line. The decline of stocks above their 200-day moving averages in small-caps (S&P 600) has been even more pronounced (from 88% to 57%). Historically, such a drop in relative performance in small-caps is a signpost of a maturing bull market.