MDM - Update May 4, 2012

Published : May 4 2012 at 12:00 ET

Many leading stocks continue to hold up reasonably well.

Since quantitative easing (QE) began in 2009, the market has only had two significant corrections: May 2010 and August 2011. The Market Direction Model caught both corrections.

In studying market pullbacks since 2009, many are short lived but occur quickly, over a handful of days. Other than those two major corrections, the market tends to have corrections of small magnitude, always less than 10%, and often less than 5%. For example, in 2009, after the NASDAQ Composite found its low on March 9, it had 6 minor corrections from May to December, with the worst being -7.6%. In 2010, not including the May Flash Crash which resulted in a choppy, volatile market from May to August, the NASDAQ Composite corrected twice, with corrections of -9.7% and -5.1%. In 2011, not including the steep decline in August which led to a choppy, sideways market from August to December, there were 5 minor corrections in the NASDAQ Composite, with 4 of these being less than 5%, and the worst being -8.3%. So far in 2012, the current correction is just around 5-6% on the NASDAQ Composite.

The best course of action is to sit through this mushy market as it should eventually find its footing before the market selloff gets much worse, if QE history is any guide. Further, many leading stocks continue to hold up in reasonable fashion. That said, if the model senses the potential for quick gain to the downside (as such gains tend to come quickly since 2009), it will switch to a sell signal.


From an earlier report:

The Federal Reserve has been stating no QE, but they have also promised to keep interest rates low which means they will continue to buy treasuries with newly printed money. Indeed, QE, here in the U.S. from the Federal Reserve, in the U.K. from the Bank of England, and in Europe from the European Central Bank, comes in many forms and should continue to prop the markets higher, though with the occasional correction as the market climbs the “wall of worry.”

Adding additional support to the idea that central banks around the world will continue to print money, the price of gold continues to base rather than collapse and this is a good sign that QE is still alive and well. Gold is in the 12th year of its long term uptrend which began in 2001.

The Market Direction Model adapted to QE in 2009 so given the short length of selloffs, future sell signals will probably be shorter lived to capture any quick downside gains. Note, that both significant corrections in May 2010 and August 2011 occurred over just a handful of days. So it was only a question of order of magnitude of the selloff rather than the number of days it took for the market to fall.

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