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Portfolio > ETFs > Broad Market

What's Next for Stock Markets After the Spring '10 Correction

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Since their April highs, the major indexes have fallen more than 10%. This is the biggest correction since the rally started in March 2009.

It is also the first time in 216 trading days that the S&P 500 (SPY) has fallen below its 200-day moving average.

The last two weeks brought some horrendous down days and sharp rallies, a pattern reminiscent of what happened in September/October 2008. Is this just a correction or will it morph from correction into meltdown?

When assessing the market’s whereabouts it always helps to take a step back and look at the bigger picture. Did the April highs have some of the symptoms of a major market top?

A look at the data conveys an unmistakable message. In April, we saw the Volatility Index (VIX) drop to the lowest level since July 2007.

The CBOE Equity Put/Call Ratio fell to the lowest level in nearly a decade and the percentage of bullish investment advisors rose to the highest level since December 2007. Investor’s cash allocation dropped to the lowest level since April 2000. What’s the common denominator?

Most extremes reached were the most pronounced since either 2007 or 2000.

On April 16, the ETF Profit Strategy Newsletter pointed out, that “historically, there has rarely been a more pronounced sell signal. The pieces are in place for a major decline.”

On May 14, the newsletter emphasized the bearish setup and warned, that “prices should work their way below Thursday’s (5-6-10) intraday low of 1,066 for the S&P.”
We are there now, what’s next?

A look at valuations shows that stocks are still expensive and historically overvalued. It was just last year that the P/E ratio spiked about 140, as reported by Standard & Poor’s.

The P/E ratio has come down since, but according to Professor Shiller, is still about 40% above the norm. Historically however, the market doesn’t bottom when P/E ratios hit “the norm;” it falls to rock-bottom levels – or at least that’s what it’s done in all major market bottoms.

Based on sentiment readings, technical indicators, fundamentals and valuation metrics, the message is clear: Lower prices are ahead.

The ETF Profit Strategy Newsletter provides a detailed analysis of a variety of indicators mixes with a fair amount of out-of-the-box thinking and short-, mid- and long-term market forecasts, along with a target range for the ultimate market bottom.


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