Will the crisis in Libya finally produce a (needed) market correction?

02/24/2011 1:38 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Way back on January 20, I wrote that the U.S. stock market was headed for a 5% correction. In fact, I said that the market needed a correction. (See my post http://jubakpicks.com/2010/02/17/so-is-the-correction-over-already/  ) The U.S. market was overbought, I argued, and needed a reset before stocks could stage another advance. I wasn’t the only one saying that by any means. Just about all the technical analysts I read were looking for a correction.

We never got it. The biggest retreat was a 1.9% drop on January 28, the day of the Friday of Rage protests in Egypt. But that was it. Investors remained nervous, emerging market stocks fell, but U.S. stocks just kept inching ahead. After closing at 1276 on January 28, the Standard & Poor’s 500 moved up to close at 1343 on Friday, February 18.

Will the near-civil war in Libya change that and finally produce the long-awaited drop?

The 2.05% decline in the S&P 500 on February 22 didn’t do lasting damage but it did push the index down toward some important technical levels. The drop took the NASDAQ 100 index down through its 20-day moving average, the first indicator to watch if you’re trying to see if a rally is starting to correct. The wider NASDAQ Composite and the S&P 500 haven’t yet moved below their 20-day moving averages but they are threatening to do so. The next stop, the sign that a real correction is in progress, is the 50-day moving average on the S&P 500 at 1284. That’s 31 points, another day like that of February 22 with its 27.6 point drop and then some. A drop to 1284 would be a 4.4% decline from the 1343 of February 18.

Emerging markets, however, are already in much worse technical shape. The Hong Kong and Singapore iShares ETFs (EWH and EWS, respectively) are both below their fourth quarter lows. The iShares MSCI Emerging Markets index (EEM) is below its 50-day moving average and just failed in an attempt to move above that average.

As you probably know, and as I’ve written repeatedly lately, the world’s emerging markets in a modest (or in the case of India not so modest) correction.

We’ll see whether that gets worse in the emerging markets in the next days and weeks (I suspect so) and whether the U.S. market, the strongest in the world lately, joins them with its own much more limited drop. A lot will depend—obviously, no?—on events in Libya.

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