Has a Correction Already Started?

You don't really see the correction in the major indices yet, but one sector at a time, it is happening, which you can see in the charts from our post on Monday.  Furthermore, as you review portfolios of stocks, you can certainly see it.  It is almost like a choreographed dance troop. 

It all started as our Psychology Composite moved very close to crossing the threshold from P4 to P5 three weeks ago.  The going got a little tougher.  We saw 87% of the stocks in the S&P 500 and S&P 400 move up above their 50-day moving average.  In other words, the recoil rally from that horrendous sentiment in early October of last year got its legs as 2012 kicked off, and it made the easy trip carrying virtually all stocks. 

In general, the most rewarding "recoil" occurred in the stocks that had been punished so bad in the 3rd quarter of 2011.  But now, it is time for stocks to earn their progress.  The ones that are showing huge earnings gains are still climbing in their progression, but we are seeing a definite decay in the momentum of the rally - one step at a time.  Some sectors (stocks) ran out of steam as much as four weeks ago, and one by one, we now see most stocks starting to stall.  Of course, there are the Apples of the world that are out there in space, but you can see the cracks starting to appear in most other stocks.

There are no certainties during these bull market corrections that still have basic solid underpinnings (strong Monetary and Valuation), but when the market gets extended in some of its overbought characteristics, and Psychology also starts to show a little too much enthusiasm, Mr. Market often calls a short-term halt to repair any cracks in the "Wall of Worry."

Don Hays

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