Saturday, February 25, 2012

The end of a ten-month correction

The correction that began in late April of last year has officially ended, now that the S&P 500 index has closed at 1365 and surpassed the April 29 peak of 1363. This marks the S&P's highest level since mid-2008, but is still 200 points below the October 2007 peak of 1565.

Since this last correction never passed the 20% decline threshold for an official bear market, it means that my technical method of predicting bear markets was successful - in April it did not foresee a bear market.

All things being equal, I'm inclined to predict that in the long run the stock market will approach the overhead resistance level of the 2007 peak and then descend into another bear market, but if that forecast becomes conventional wisdom then I have a problem, because my philosophy holds that conventional wisdom is usually wrong.

In the short term I'm a little leery of this current rally because of the low volatility and moderate optimism that's prevalent now. Given the looming global economic precipice and insanely low dividend yields, I would need to see several short-term stars align before I placed any bets on a continuing rally.