Sunday, April 19, 2015

Is This The Beginning Of A Larger Equity Market Correction?

Awaiting the 10% equity market correction seems to be on the minds of a number of strategists as soon as the market begins a turn lower. The last correction of greater than 10% occurred in 2011 when the S&P 500 Index declined nearly 20% between July and October 2011.

Since March 23rd through Friday's close, the S&P 500 Index has declined 43 points to 2,072 or a decline of just 2%. In the first week of March, the S&P fell 3.5% before rebounding. An important support level has been the 50 day moving average; however, when this level is violated, the 150 day moving average has served as strong support for the market. As can be seen in the below chart, the S&P 500 Index closed below the 50 day moving average on Friday. What appears important about the technical set up at this point is the stochastic indicator is just now showing an overbought level for the market. In prior 50 day moving average violations, the stochastic indicator did not show as oversold until the market found support at the 150 day moving average.

From The Blog of HORAN Capital Advisors

So given this technical set up, should an investor wait for a more significant pullback before investing? As Peter Lynch once said, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves." To this end, as we noted in our post earlier today regarding the Citgroup Economic Surprise Index, this index is at a level that historically has signaled a bottom for the equity market. Additionally, the below charts of the percentage of S&P 500 Index stocks trading above their respective 50 and 150 day moving averages are not at a level indicative of an overbought market.

From The Blog of HORAN Capital Advisors

Lastly, Friday's close for the CBOE equity put/call ratio came in at an elevated .74. As we have noted in the past, the equity put/call ratio is most predictive at its extremes. A level that would support extreme bearishness would be a ratio above 1.0.

From The Blog of HORAN Capital Advisors

Certainly, investors need to be mindful the lack of a 10+% correction is approaching in excess of three and a half years. This would place this streak in the top three in terms of months passing without a 10% correction. But more importantly, company fundamentals and economic fundamentals play a significant role in terms of the future direction of the market. A more significant pullback would not surprise us; however, we believe investors can continue to find investable values in this time of elevated market volatility.

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