LANGE FINANCIAL SERVICES: MARKET UPDATE: February 20, 2012 8:00pm
Since the middle of January, there have been increasing calls by practically everyone for a decline of perhaps 10% in the popular market indexes. While it is hard to rule out a correction/consolidation given the 24% rally in the S&P 500 from the early October bottom, we expect that any decline will be modest, perhaps in the area of 3% though we expect that it will come from a higher level.
In recent action, somewhat troublesome technically is that new weekly highs have been in the vicinity of 350 in each in the past two weeks compared with some 550 reached three week ago. The Dow made a three-year high on Friday setting up this and other divergences.
Also diverging is the fact that as the DOW reached a three-tear high on Friday, the Dow transportation index remained some 400 points under its 12-month high, setting up a bear market pattern for the Dow theorists, with one average not confirming the other. We are just pointing out conditions that could be the forerunner of a short term top. This would be the opposite of the volume and divergent patterns that we pointed out last summer/fall as the bottom unfolded against the barrage of bad news including the US debt downgrade, the debt ceiling fiasco, and the Eurozone crisis. This gave us the basis for turning bullish at the October bottom against a background of bearishness.
However, despite some near term concerns, we remain quite positive on the market overall. Our long standing target for the Dow remains about 14,000, a level that represents a reasonable price/earnings ratio of about14 times forward earnings. The economy continues to show signs of strengthening. Investors are generally cautious and under invested and certainly not aggressive. As we get into the second half of the year the political direction will have to followed closely.
We still view weakness as an opportunity to continue to accumulate well positioned and reasonably valued growth companies [see Favored Stocks List]. Reciprocally, we would be alert over the next couple of weeks to nail down some profits [see Trading Guideposts for our thinking in this respect].