Stocks have enjoyed a nice meltup since late 2011, and now a
period of consolidation could be in order. I expect it to be
frustrating but doubt that it will result in a significant
The reasons for the pause are slowing momentum and several key
resistance levels. The overall technical and macro backdrops,
however, remain quite positive.
The current environment seems to resemble what the market faced in
early 1991, when the index had battled its way to new highs but
then spent the better part of a year consolidating those gains. It
repeatedly pulled back to test support around its previous peaks
before eventually breaking out to new highs.
The technical event that caused the breakout was that a key
long-term moving average, in this case the 200-day, eventually
caught up with the S&P 500. It would then spend the next year
coaxing the market higher.
The question now is which moving average is needed to support
buyers. I suspect that it will be a shorter-term one such as the
50-day because, unlike the early 1990s, the economy is now in a
much stronger expansionary phase.
Why am I not looking for a steeper correction? First, we have a
positive economic backdrop, with rising employment trends. Second,
we have a market that's underowned and undervalued. Third, we had a
terrific rally in recent months that woke up many long-term buyers.
And fourth, as I have outlined previously, both
have made long-term tops.
But the most important reason not to be bearish is that the chart
isn't yet supporting that case. Last summer's selloff followed an "
inverse head and shoulders
" reversal pattern on the S&P 500, for instance, but nothing
like that is in the cards now. Nor will it be a danger as long as
we hold those 2011 highs.
Another trend that seems to be emerging is a shift toward
healthcare as stocks consolidate. The SPDR Health Care (XLV)
exchange-traded fund is emerging as the strongest sector index in
the last two weeks after lagging the S&P 500 in the last six
months. This group has seen some big acquisitions and now could get
another shot in the arm if the Supreme Court rules Obamacare
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of April 4.)
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