Stock Market Analysis

Tuesday, July 02, 2013

Intermediate Correction Still Got Legs?

The Dow closed lower by 42 points today despite better than expected economic data.

Fundamentals
Fundamental data has been roaring good lately, leading to the recent market pull up. Both sales data and Factory orders continue to turn in better than expected today leading to an early rally. However, profit taking quickly set in afternoon to take the market back into the red. In fact, some profit taking was already evident in the morning as the market opened in the red as well. Indeed, after quick runs like this, investors and traders would be looking to take some short term profit off the table. This short term profit taking sentiment is echoed in the slightly lower bond yields across most maturities and the total equities put call ratio going above par in favor of put options trading once again. Does this mean that all the good economic data are going to waste? Definitely not, the market is still in global recovery mode and good economic data always transforms into good stock market results... the only question is, "When", which is when we look at the technicals.

Technicals
Despite the spate of good news on the economic data front, technical behaviors such as an intermediate correction still has to run its course before all that confidence built up by such data can transform into an all out optimistic buying sentiment. The recent run upwards is merely a normal "dead cat bounce" within an intermediate correction and has proven itself to be so by its stoppage at around the 30MA. From here, the Dow should make one more significant down leg to around 14,200, like I mentioned the last time, before this intermediate correction can bottom out and turn around on all the good economic data for new highs. Indeed, without a significant correction like this, investors would always be buying with a sense of foreboding and always holding back which would not be good enough to drive the market to new highs. This is why I always say intermediate corrections are actually a good thing.

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

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