Time for the Market to Pause and Let the Economy Catch Up

We've been in the camp for the last two weeks that it was time to take a breather - at least in the momentum of the rally.  Of course, we have to keep this in context, since the January rally has been nothing more than part of a normal relfex rally following the intense pain of the 2011 correction.

Our analysis is indicating that we are at a juncture when, at the very least, the momentum of the recent rally should moderate, and at the most, we could see an overall market pause.  Furthermore, we believe the "pause" has already begun.  You can see this in a few of the indicators that we follow daily, such as the McClellan Oscillator, which has started to roll over.  Just take a look at the chart below.

Click on the image above to view a larger chart.

Yet, as our Asset Allocation Model suggests that we remain bullish on the long-term view, what story fits the short-term "pause" criteria?

I'm just guessing that we might have to mess around for a few months to cool Psychology back to a more normal rating.  So with the fairly mundane 4th quarter earnings coming out, the analysts will really start to downplay expectations for the 1st quarter results.  Usually the downplay in expectations leads up to a quarter end and creates some reactions in the stock market.  That would be sometime in March.  Then, when the actual results beat their more somber estimates (early April), they start to upgrade.  Flip.  Flop.  The good investor recognizes this trend, so they flop when the analysts flip, and vice versa.

My economic guess, therefore, is that in the time until a few weeks before the end of this quarter, as those flips stay somber, the market may also digest a few of the recent gains.  And as emotions cool just a little, then the infrastructure will be stronger and ready to support the next rally early in the 2nd quarter.

Don Hays

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