Investors who check their portfolio regularly probably don't need to be told that the long-awaited corrective phase in the markets is upon us.
But have we reached the bottom? Are we close? According to the technical analysts at Montreal-based Phases & Cycles, not yet. They offer the following four reasons why you should sit tight and keep your powder dry.
1. Corrections typically re-trace between one-third to one-half of the previous advance
For the S&P 500 this means a decline to 1,754 (one-third) or 1,706 (one-half). The one-third target has been reached while the one-half target is still open.
2. A new 105-day cycle has begun
Since mid-2012 the S&P 500 always finished the 105-day cycle at a higher level than the previous cycle. As the bull market ages, the odds of continuing this pattern (which implies short-lived corrections) is lessening.
3. Buying on this dip won`t work
Buying during the regular dips has been a successful strategy throughout 2013. However, like the 105-day cycle pattern, this buying strategy will break down at some point. "The late-January dip is tempting to buy into, but a second down leg is likely to lead to a better buying opportunity, given the downside targets," say the report's authors.
4. Bullishness is still too high
In early January, the Investors Intelligence survey reported 60.6 per cent bullish opinions. At month's end it fell to 53.1 per cent. While overly bullish sentiment has declined significantly, there is a need for further corrective action to increase the pessimism and take this contrary indicator back to bullish territory. The percentage of bears in the Investors Intelligence survey did not budge in January.
Looking at the charts, the S&P 500 has roughly followed its 50-day moving average (currently at 1,809.32) since January of 2013. It has since broken well past that level and is slipping toward its 200-day moving average (currently at 1,701.35).
The folks at Phases & Cycles offer the following advice: "It will pay to be patient and let the correction run its anticipated full course. A better buying opportunity closer to the 200-day Moving Averages will likely emerge."
You can read the entire Phases & Cycles report here.
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