U.S. stock market: due for a correction

05 January 2014

Regardless of how the economy performs this year, I suspect the U.S. stock market is due for a correction, perhaps as soon as the first quarter of 2014. Sentiment is very bullish and fund managers have piled into the market en masse to avoid under-performing their peers or their benchmarks. People generally believe the Federal Reserve has managed to rescue the economy. The market has moved straight up for one year with at most very shallow pullbacks. I believe the time is ripe for the market to rattle some nerves.

The first chart below shows the 10 and 30-day moving averages for the NYSE Advance/Decline line. The 10-day (blue) is a short term indicator, while the 30-day (red) is an intermediate term indicator. The second chart is the weekly S&P 500 chart for the same period.

nyad3yr05jan2014

spx3yr05jan2014

The NYSE A/D 10 and 30-day moving averages are the short and intermediate term breath indicators I use to gauge whether the market is overbought (sell/hold signal) or oversold (buy/hold signal).

Currently, we are short term overbought, but intermediate term, we are neutral. (The short term refers to 5 to 10 days; the intermediate term refers to 5 to 10 weeks).

The chart below shows the cumulative NYSE A/D line for the same period as the above two charts.

cumulativenyad3yr05jan2014

The cumulative A/D line has confirmed the new high made recently by the S&P 500.

Thus whilst I suspect a correction is overdue, it is not likely to be too steep and should represent a buying opportunity.

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About E-Jay Ng