The market’s been taking a bit of a beating lately. On March 4, the Dow Jones industrial average and the Standard & Poor’s 500 index closed at 3-1/2-year highs.
Apparently that was enough to bring out sellers, because the major averages suffered pullbacks of 2 percent to 3 percent the next week.
Each time the market falls, I get the feeling there are more than a few people ready and willing to call the start of the next bear market.
Actually, a vast majority of the indicators I follow are pointing toward further new highs in the months ahead.
As I already mentioned, the Dow and S&P recently closed at new multiyear highs. In addition, new rally highs were recorded in the Dow Jones transportation average, which reached an all-time high, and in the Dow Jones utility average. The S&P mid-cap and small-cap indexes hit new highs, along with new rally highs in most major foreign equity markets.
These new highs were all matched by highs in the internal condition of the market, which is measured by advancing vs. declining issues and volume. We are clearly in a bull market and bear markets don’t get started until many of the previously mentioned conditions have deteriorated at least a few months.
There are obvious sections of weakness in this bull market, namely technology. The NASDAQ market is more than 6 percent off its high that was recorded almost three months ago. Tech stocks have been moving sideways for weeks and can’t seem to get a head of steam going. If this continues for another few months, the rest of the market will begin to have problems.
I first mentioned the possibility of a correction in the energy stocks three weeks ago, and it seems the pullback has finally begun. When leading stocks suffer shortterm corrections, prices can fall up to 20 percent without disturbing the strong uptrends. The bull market in energy stocks is so powerful right now, though, that many of the leading issues may fall only 15 percent before regrouping.
Most likely, I will add to my positions in this sector if prices fall another 5 percent. As a reference, you can check out the Exchange Traded Fund OIH. It hit a high of about $100 a share a few weeks ago, and it closed at $94.35 March 14. The 50-day moving average of prices is currently at $90, so a fall a little below that support line makes sense as an entry.
The transportation average is once again putting on a spectacular move. This index was one of the best performers in 2004, and so far it is up 1 percent this year. On a relative basis, it is doing better than most of the market. The transport index has pulled back, but as prices fell, the relative strength line for the index hit a new high.
This is called a positive divergence, and it probably means the index itself will hit another high soon. Even with oil near record levels, the transports are plowing higher.
All in all, I don’t see any reason to panic. We are not in the sweet spot of this bull market anymore, though.
Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at email@example.com.