Stock Market Trends: Is a Mini-Correction Coming?

Steven Bobson, Europe & Americas Editor
September 25, 2012 /

Last week, the stock market spun in place. The NASDAQ finished a little more than four points lower than where it closed the previous week, the Dow shed roughly 14 points, and the S&P moved down roughly five – definitely not an exciting week.

However, the indexes did put on a good volume show as options expired on Friday. It was one of the most active days of 2012. Sometimes, spikes in volume mark tops and bottoms. Folks who have been hanging on to profitable stocks get an itchy trigger finger and the profit-taking correction begins. I am not 100% sure that a string of red days is ahead just yet, but it is something to monitor.

What does concern me is our market measuring sticks. I am starting to see our short and medium term indicators weaken. Our shortest model reveals that momentum in waning. The reading remains “buy”; however, the weekly score has moved underwater and another flat to down week would flip the overall score to sell. That’s how close to the line it is.

At ETF Stocks, our Market Leadership scorecard is in the “buy” zone, too, but like momentum, barely. The leadership indicator monitors the 10 week performance of the indexes, and we use a proprietary ranking system to determine if the indexes are in “buy”, “sell”, or “hold” positions. Much like the momentum model, leadership is a few negative days or another week of flat trading away from turning sour.

ETF Stocks longest measuring stick determines if the indexes are in a sideways, bullish, or bearish trend and volatility. From our point of view, a bullish volatile reading has been the most rewarding as stock aggressively pop and selloffs are short and mild.

The indexes have a lot of goodwill stored up, and it will take roughly a 5% move south in the week ahead for our TYPE model to switch to a sideways reading. As for volatility, minus two outbursts, the range from top to bottom has steadily declined since July. Last week’s couch potato status for Wall Street provided the smallest percent difference form the week’s high and low marks in nearly two years.

Based on the picture our models are painting, ETF Stocks believes a minor correction could be in store. However, the uptrend remains intact. A red tape could be nothing more than a mini-move within the larger move higher. In that case, rather than selling short or taking defensive measures, investors might be better off buying the dips(s).

We would suggest focusing on key moving-averages as points of entry. The 12-day mark has held up fairly well for the NASDAQ as the index has not fallen much below the dozen day trend-line since the start of August. If NASDAQ makes its way to 3,150ish, investors might consider nibbling with new money.


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