Stock Market Analysis

Tuesday, June 07, 2011

Intermediate Correction Underway... Where Is the Fear?

The Dow continued into its intermediate correction today, closing down by 19 points despite better than expected sales data.

Fundamentals
Sales data continue to turn in better than expected for a second straight week this week on Memorial day sales. Even though the data led to an early bargain hunting, reality soon set in as investors sold off on the strength in the afternoon, taking back all the gains and more. Investors who did not "Sell In May and Go Away" were clearly regretting it and looking for exit points right now. As such, we can definitely expect more selling into any strength in the days to come as this correction unfolds.

Technicals
The intermediate correction that I have been talking about for so long is at last underway. I have been talking about this since I observed the volatile uptrend in April. One percularity I observed in the intermediate correction this time round is that it is not supported by a surge in the VIX. The VIX, as a fear gauge, is the index that would normally surge whenever a strong correction occurs in the market. During the last intermediate correction in May 2010, the VIX more than doubled in days but this time round, the VIX doesn't seem to be reacting much to the market but rather stayed at its average level of about 18 to 20. In fact, there was a much stronger reaction on the VIX during the last short term correction in March 2011 than it does now. This goes to show that investors and traders are really not in a "panic mode".... yet. It also shows that investors and traders still have their nerves and could still provide support at strategic levels, perhaps around the daily 200MA level. A look at the total equities put call ratio shows that it has been put options inclined for the past few days which is how it usually behaves in a bearish market. As such, this is an intermediate correction without too much of the fear and investors are clearly waiting for a strategic level to end this correction and resume the intermediate bull trend. Indeed, I have always said that the US market needs this intermediate correction in order to move higher in a healthy manner, which makes it a positive thing rather than a negative one.

For now, the Dow turns a short term bear trend, within an intermediate and primary bull trend.
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