SuttonWatch.Net: U.S. Stock Market - Is The Correction Over?

The rebound in U.S. stock prices late last week was impressive, but does this mean that investors now have the green light to add to their equity holdings in anticipation of a new sustained uptrend?

A review of recent price history may prove helpful.

On Thursday and Friday of last week, the S&P 500 Index rebounded 3.40% from its intra-week low. The entire recent correction from mid-January’s peak to last week’s low in the S&P 500 was -6.10%. For the Nasdaq Composite, the numbers are very similar (-6.55% correction followed by a 3.95% recovery). However, the correction in the Russell 2000 Index was significantly more at -8.45%, and the rebound was significantly less at 3.12%.

Is it important that small-cap stocks have underperformed larger cap stocks since mid-January? I think maybe yes, but it’s clearly not the whole picture.

For your review, I have attached four key daily prices charts below. These include the S&P 500 Index, the Russell 2000 Index, the Gold ETF (GLD), and the Silver ETF (SLV). The 20-day, 50-day, and 150-day moving average lines have been drawn in all four charts.

Here are my observations:

The 150-day moving average line has provided excellent support for about 15 months in the S&P 500 Index and the Russell 2000 Index. In fact, the last time the S&P 500 closed below its 150-day moving average line was November 15, 2012. And for the Russell 2000, that date is November 21, 2012. Last Wednesday, February 5^th, both of these key indexes successfully tested their 150-day moving average support lines, although just barely for the Russell 2000 Index.
The S&P 500 Index rebounded sharply from Wednesday's intra-day low and is now knocking at the door of overhead resistance in the form of declining 20-day and 50-day moving average lines.
While the Russell 2000 also bounced nicely from support at its 150-day moving average, unlike the S&P 500, the Russell 2000 needs to rally quite a bit more (+2.2%) in order to test its overhead resistance at the 20-day and 50-day moving averages.
The Gold (GLD) and Silver (SLV) ETF’s are both now above their 20-day and 50-day moving averages after basing price action which has lasted more six months.

Except for a few brave analysts (Citi’s FX Technical Group is notable), Gold and Silver still appear to me to be the most hated investment classes among so-called Wall Street experts. And while equities aren’t quite as loved as they were six weeks ago, the stock market is clearly still the preferred class by most sell side analysts. If we view sentiment as a contrary indicator (which I do), then equity prices are immediately vulnerable to another selling spree and gold/silver prices will continue to outperform most investment classes at least over the near term.

In the interest of full disclosure, I am long Gold/Silver mining shares and/or short the S&P 500 in all my managed accounts. The short S&P 500 position is executed with the Pro-Shares SDS double short ETF.