What has the market correction told us?

If you are anything like us, you've grown very weary with the internal observation of the stock market telling us that a camouflaged correction has been in effect since last September.  This week certainly settled that as the camouflage lifted and the unhealthy optimism of a month ago started to melt away.  The OEX volatility index (VXO) has moved from that "cocky" level of 14 only a few days ago to a "nervous" 31 this week. 

Our Psychology Composite has improved just a smidgeon, and this alone gives us some hope for the weakness of the last two weeks to find support.  Also, our short-term oscillator has moved to oversold - another feather in a returning bull market's cap.  But we'll have to watch a few more days to see how the momentum plays out.  We have been hoping for a return of Psychology to at least P3, and so far, that has not occured. 

It is very obvious that the stock market "needed" a correction and has had one.  Our guess is that we will get a bounce here, but the time expended for this correction was not as much as usual.  So, I'm not expecting a dynamic sustained rally for a while.  Instead, it may be 2-3 months before the real bull is resurrected. 

But overall, we believe this bull market is young, and it has much more ground to cover before it decides to exit the scene.

To view today's complete Weekly Sector Report, click here.

Don Hays, Nicholas Warf and Justin Wood

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