April 2, 2013 - correction just around the corner

It's been a nice 18% run, but it's over. The market is up against strong resistance and the short term breadth is awful. Such a pessimist tone is not appropriate because the bull is not over, but, still, a 7-10% correction is just around the corner.

I drew resistance on the monthly chart above. There were many other important levels that did not manage to shake the market for more than a few days, but this is the ultimate level - the high from 2007. The market will most probably rise and close above this level and then turn lower in the following days.

Here is an indicator of breadth that shows important divergence - the 13d ema of TRIN.

The weakness of this indicator has been disregarded by the market in the recent past. In fact, I was expecting  a larger correction based on this indicator in my previous post. The big difference now is that the market has already risen by 18% and it is making record highs.


There are also some economic indicators that are sensitive to intermediate term fluctuations in economic activity. These are quite correlated to the market and they are suggesting a slowdown.

Here is the 3 month average of the New Orders vs.Inventories ratio,

the US PMI, which has turned lower recently,

the pace of change in Retail Sales, also turned lower,

and the pace of change in Employment (private payrolls)

Over the long term the bull is still alive. Employment in the US has been doing constantly ok and this should fuel the expansion at least until the end of the year. Overseas, The Chinese PMI has started to rise strongly and even the European economy is at the beginning of an acceleration phase.

Here is the Business Cycle Clock from Eurostat, showing the European Economic Sentiment Index (ESI), an indicator that leads economic activity and even the markets.

Thus, a correction that stays within the parameters of a bull market is a buy. It will probably reach the 1420-50 zone, but this level is just a wild guess for now.