The Market's Correction Is Over

02/25/2010 10:49 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says the recent market correction has run its course, and he thinks stocks and commodities will move higher again.

It looks like the stock-market correction is over. It ran three weeks and covered 9%, which is just about a garden-variety correction. In the old days, we used to say a month or more and 7% to 10%.

That sort of prediction was historically based on some type of divergence at the top, such as a lessening of new highs, but this time there was no such divergence. Instead, the top was a well-confirmed high and the correction proceeded at breakneck speed. My guess is that it’s market evolution and we can expect more of this sort of thing.

One sign that the correction is in fact over is that we have immediately returned to the dynamics that prevailed prior to the correction—namely, the advance/decline (A/D) line leading prices higher.

One thing we watched very closely during the correction was new lows, and there weren't any to speak of, which is exactly what we wanted to see. If it were a correction, new highs would be expected to dry up—and that they did—but new lows would not be expected to expand, which they did not.

If it were something more than a correction, new lows would be one of the first places we'd look for evidence of an emerging down trend. February 5th was the only day in the correction that new lows exceeded new highs—19 to 13. From then on, new highs started to expand again and new lows dried up, exactly what we'd expect at the end of a correction.

After the initial correction low on January 19th, both the market and the A-D line rallied and peaked on the second and third of February before turning down again. Both the A-D line and net new highs have exceeded those levels, though the averages have not yet done so. We expect the averages will follow shortly.

Commodity prices pulled back over the past month and have turned higher again, much like the stock market. In fact, most things tradable still seem to be locked together. That these high correlations persist so long after a market disruption is puzzling.

Expectations on the economy are all over the place, from those calling for a Depression to those calling for a V-shaped recovery. We find neither extreme interesting. What we expect is a gradual recovery, probably stronger than consensus, that takes quite a while. Jobs will lag and will continue to be an indicator that fools people into believing that the economy itself is in worse condition than it actually is.

Yes, there is some economic linkage that makes sense, but all the world’s markets are basically marching in lockstep, with little regard for the asset class. I am wondering if the recent market disruptions haven’t changed the character of the markets.

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