Libya… Like Egypt?

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

For many, many weeks, I have discussed the stock market's need for a pullback. A short-term cleansing to refresh the rally. Unfortunately, far too many others have been talking about it as well, so the market decided not to accommodate, until it wanted to.

Several weeks ago, I offered that the pullback so many were looking for would probably come out of nowhere with some geopolitical event and would quickly lop 4-7% off the major indices. Tuesday was just that day, following more unrest in the Middle East. This time it was Libya with its big supply of oil. Since I have been writing about this pullback since late last year, I certainly deserve zero in the way of credit for it finally happening. I mean, even a broken clock is right twice a day! Call for something long enough and it's bound to happen at some point.

As I've mentioned before, it's still incredible that the Dow has not closed below its 20 day moving average (average price of the last 20 days) since 12/1 as you can see below. That's historic momentum! I am going to go out on a limb and say that the market will not respond the same way as it did with Egypt and this time it will close below the 20 day moving average in the coming week or so.

But at the same time, I also do not believe this is the start of a real correction (10%+ downside). Corrections typically do not start with a bang like we saw on Tuesday, just one day removed from the high. Instead, more significant declines usually start slow and small, building towards the large down days, like snowball rolling downhill and gathering momentum. When is a snowball and market going the fastest downhill? The second before it hits the bottom. In this case, we could (and should) see some more downside, but I don't think it's anything serious, yet.

I'll be watching for signs of sector rotation among leadership, both positive and negative, along with any indication that the emerging markets are ready to percolate again. As the major US indices have steadily marched higher since December, which you see from the above chart, emerging markets, chart below, weighted towards the big countries like China, India and Brazil, have totally lost their leadership role and unable to make upside headway.

Equally as important, the performance of the high yield (junk) bond market must be closely watched after the single most dramatic bull market run in history. For the most part, as long as the high yield market is confirming the rally and outperforming on the downside, the structural bull markets in stocks should continue, for now.


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

Until next time…

Paul Schatz

Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

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