Back on January 19, 2011, we made some projections regarding the market’s extended technical state and the possible onset of a correction; from that post:
The extended technical state of the markets will need to be cleared at some point over the coming weeks. Our market models, along with historical market data, enable us to make some guesstimates regarding when a pullback may begin. Recently, we used the CCM Bull Market Sustainability Index (BMSI) and some back-of-the envelope calculations to project future BMSI levels, based on current BMSI levels and recent trends in numerous technical indicators. This type of projection is not used to make decisions today, but it does help us better prepare for possible chess moves over the next few weeks. This is a planning exercise, not an execution exercise.
The market did get a pullback, or more aptly referred to as a period of consolidation in mid-to-late January, which reset the correction clock. We did some very limited buying as conditions improved again.
Last night we updated the correction watch calendar using the BMSI and recent trends.
The yellow portion of the calendar above could come into effect in as little as eight trading sessions. Therefore, any new investments made with cash need to be very flexible and easily converted back to cash. The bulls remain in control, but this market could give back some gains in a rather rapid fashion sometime in the coming weeks or months.
In terms of strategy, we are happy to hold our current long positions for now. We may be willing to invest relatively small amounts of cash should a decent entry point present itself. As we outlined in Is The Market Extremely Overbought? – extended and overbought markets can continue to advance. With the Fed’s eighteen primary dealers still getting cash injections via the second Quantitative Easing Program (see Who Gets The Fed’s Printed Money?), the market may hold up quite a bit longer than we expect. We have to pay attention with an open mind about both bullish and bearish outcomes.