Intermediate Correction Underway... Where Is the Fear?

The Dow continued into its intermediate correction today, closing down by 19 points despite better than expected sales data.

Fundamentals
Sales data continue to turn in better than expected for a second straight week this week on Memorial day sales. Even though the data led to an early bargain hunting, reality soon set in as investors sold off on the strength in the afternoon, taking back all the gains and more. Investors who did not "Sell In May and Go Away" were clearly regretting it and looking for exit points right now. As such, we can definitely expect more selling into any strength in the days to come as this correction unfolds.

Technicals
The intermediate correction that I have been talking about for so long is at last underway. I have been talking about this since I observed the volatile uptrend in April. One percularity I observed in the intermediate correction this time round is that it is not supported by a surge in the VIX. The VIX, as a fear gauge, is the index that would normally surge whenever a strong correction occurs in the market. During the last intermediate correction in May 2010, the VIX more than doubled in days but this time round, the VIX doesn't seem to be reacting much to the market but rather stayed at its average level of about 18 to 20. In fact, there was a much stronger reaction on the VIX during the last short term correction in March 2011 than it does now. This goes to show that investors and traders are really not in a "panic mode".... yet. It also shows that investors and traders still have their nerves and could still provide support at strategic levels, perhaps around the daily 200MA level. A look at the total equities put call ratio shows that it has been put options inclined for the past few days which is how it usually behaves in a bearish market. As such, this is an intermediate correction without too much of the fear and investors are clearly waiting for a strategic level to end this correction and resume the intermediate bull trend. Indeed, I have always said that the US market needs this intermediate correction in order to move higher in a healthy manner, which makes it a positive thing rather than a negative one.

For now, the Dow turns a short term bear trend, within an intermediate and primary bull trend.
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Intermediate Correction Starts?

The Dow continued to slide into what is shaping up to be that overdue intermediate pullback I have been talking about for so long.

The Dow retreated 251 points last week, sending the Dow back down to its weekly 30MA (30WMA). The Dow's weekly 30MA has always been its intermediate trend support. Closing below the 30WMA on a week on week basis almost always promise more downside to come. The Dow is currently right on top of the line in the same fashion the short term pullback in March did. However, having two such strong pullbacks within such a short period of time always spell trouble `nd may lead on to something bigger. Yes, that overdue intermediate pullback I have been talking about.

The Dow retreated almost 1400 points in the last intermediate correction back in May 2010 before it rebounded to new highs. Since then, the market have not seen a correction of that magnitude even though it is still in the recovery phase and economic data tend to soften from time to time. As such, this could be it before the market can move on healthily to new highs.
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1-2-3 Strike To The Jaw...

What a way to kick start a new month. The Dow shed 279 points today, making it the worst day in the market since June 2010.

Fundamentals
US market took a one-two-three strike right to the jaw today as ADP employment first set a negative tone for the market opening by turning in its worst level since 2010. It was then quickly followed up by a much worse than expected ISM index, turning in its worst level since September 2009 when the recovery began. The final upper cut to the jaw came in the form of Moody's downgrading of Greek debt along with a negative outlook. This was all it needed for investors to go full flight back into the safety of bonds as bond yields dropped across the board significantly. Indeed, investors have been extremely sensitive to developments on the Greek debt issue and are reacting strongly to any such news. Yesterday's Germany offer to help resulted in a strong single day rally and today's downgrade seem to carry an even stronger reaction. The sudden drop in the ISM index was also a big concern. Not even in 2008 did we see a drop of such magnitude. It was as though the economic engine of the US suddenly got choked and ground to a crawl. The only consolation is that the ISM index is still holding above 50, which indicates economic growth and has held above this level since Aug 2009. Investors seem to have overlooked the very positive retail data today. Better retail now usually spells better economic growth in the near future and this could actually be indicative of the end of this period of very volatile economic data. Certainly the only spanner in the clockwork is the Greek issue and we can expect volatility in the market with each news update on the issue.

Technicals
It was indeed a jaw dropping day today with the Dow making a new low for the month, erasing the gains of the past 4 trading days. Still remember I mentioned that the market is overdue a strong intermediate pullback the kind we saw back in May 2010? Today's biggest drop since June 2010 seems to be heralding in such an intermediate pullback. However, it is impossible to tell if it is so from just a single day drop. Therefore, tomorrow will be critical. Investors and traders need to prove that they are capable of overlooking today's news and get back in on the bargain tomorrow in order to save the day. If tomorrow continues to be a soft negative day, then it would be clear that not even traders are bargain hunting and that maybe the intermediate pullback would happen from here on.

For now, the Dow remains in a short term neutral trend, within an intermediate and primary bull trend.
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