Stock Market Correction Reaches an Important Level

Our sector studies have been very accrately showing an internal stock market correction since November of last year.  But now that camouflaged correction has come out from its hiding, and it has impacted the entire stock maret.  As of today, the percentage of stocks in the "S&P 900," which measures both the S&P 400 and the S&P 500, has dropped to almost 21%.  In some ways, that can be interpreted as bad news, but in other ways, it can be interpreted as very good news.  Just take a look at the chart below.
  
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You can see in the chart above that except in that severe correction of last year, or in bear markets, corrections are usually stopped in their tracks when you see this degree of pain. So yes, it is possible to see more weakness (i.e. June 2010), but even in that instance, buying in this degree of an oversold market has proven to be very effective for future gains.

We've also had a few good short-term oscillators reach oversold junctures this week.  Just take a look at the chart of the NASDAQ McClellan and 21-Day Oscillators below.  These overbought/oversold oscillators are excellent short-term guides, but we never use them as a long-term indicator.  But as we turn to those important gauges, we are seeing some very promising improvement.

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So, in the short-term...it's always a question mark.  But with our long-term indicators at such positive levels, we think that these oversold junctures are a very promising time to be adding to your equity positions.

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

Don Hays, Nicholas Warf and Justin Wood

Please see important disclosures at the bottom of this page.