Bottoming Process Continues

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

The stock market continues to build a bottom to launch another leg higher during the second quarter. As I mentioned the other week, the highest volatility and largest declines are often seen right before the low, like we saw on February 4 and 5, so further weakness this month cannot and should not be ruled out. But price is much closer to the end (and maybe we’ve seen it) than the beginning.

I won't be shocked if Dow 9800 is revisited or even breached, although that should be the final bout of selling and maybe the perfect buy point if you want to try and time the optimal entry, something that won’t be easy.

At this point there is plenty of technical and sentiment evidence to support the bottoming process, such as the usually wrong, mom and pop option traders, various sentiment surveys from A.A.I.I. and Investors Intelligence, showing a dramatic shift to bears and short-term mutual fund traders running away from risk. Additionally, last week's decline showed a small slowing of downside momentum that usually presages the final low.

More technical measurements like the number of stocks advancing and declining, the volume in those stocks, as well as the number of stocks making new 52 week highs and lows also points to a market that is building a foundation for another rally above the highs made in January. My target remains in the 11,500 to 13,000 range by Labor Day, but I will update that next month.

The fly in the ointment (isn’t there always?) a little longer-term is that the investment grade corporate bond market, which peaked in September, is in danger of making lower lows, turning the trend to down. The riskier junk bond market, which assumed a leadership role for all of 2009 and made a new high in early January, has collapsed in recent weeks.

Couple the bond market problems with the fact that most sectors I follow have rolled over to the downside, the stock market certainly has the smell of living on borrowed time this year. That fits in with my theme that the next rally, as large as it may be, should be the final one before a much more significant correction or worse sets in later in 2010. The sector behavior is important because the more sectors that are healthy, the longer a rally can last. Key leadership is vital and unless something changes dramatically, I just don't see where it will come from without a full fledged correction.

Please feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…


Paul Schatz