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Running Of The Bulls

 January 28, 2013 09:32 AM

Since mid November of last year, the S&P 500 Index has advanced nearly 11%. Due to this strong rise in the market and continued strength in the month of January, 2013, investors and strategists believe a correction or pullback is increasingly likely. A part of the market's strength is due to cash coming off the sidelines and into equities as a result of investors' building cash in the run up to the fiscal cliff. One "technical" factor cited for a potential correction is the high percentage of stocks trading above their 50-day moving average. As the weekly data shows in the below chart, 92.2% of S&P 500 stocks (yellow line) are trading above their 50 day M.A. which is one signal of an overbought market. The second chart displays the percentage of stocks above their 150-day M.A. The charts certainly seem to show corrections can occur at these high percentages.

For investors then, one important question is whether stocks are owned for a short term trade or owned for the long run. I wrote a post on September 21, 2009 titled, A View Of The Market, which discussed this very same issue. At that time I wrote,
"It seems the most frequent comment I receive of late is "the market is due for a pullback".... If you are a contrarian, this is good. The more investors are skeptical of the advance, the more likely it could move higher. However, as the chart shows, this advance looks like it could or should be topping out."
The chart in that earlier post is below.

Notable in the chart is the fact the high percentage of stocks trading above these moving averages can run for an extended period of time. Additionally, as the below four plus year chart of the S&P 500 index shows, these corrections can be small relative to the longer term potential return in the market.

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