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Wednesday, February 15, 2012

Market Thought... magnitude

Now that the most talked about stock signaled a short-term top, this is giving a green-light for market players to accept a market pull-back. (Despite the fact that AAPL and the SP500 had as much correlation as a Leprechaun's love of Valentine's day over the last 6 days.)

Over the past few weeks the economic data has merited a more bullish thesis. The fundamental thesis was presented via 're-evaluation' and 'positive chatter', and remains.  Even with the stronger fundamentals, the overbought condition of the market merited a consolidation.

The interesting thing about the start of this pull-back, it was sparked via market internals, not a collective fear of Europe or Greece. There was a down-day because of the Greek drama tit-for-tat, but the market held up relatively well.  This suggests a normal, run-of-the-mill, pullback.  From an indicator perspective, that would support a shallow pullback, was the fact that the treasury yield was rising as the market was declining at the end of the day.

Below is a bunch of charts highlighting the potential technical support areas.

The daily suggest a potential move toward the 32SMA or near 1320.

If we break 1330 or so, the weekly and monthly chart suggest a move to near 1300.

I am hard pressed to think we break 1330, let alone 1300, but the market can theoretically go lower. For instance, the longer-term rally support is the 360SMA on the daily (around 1260), but we just dealt with some of the greatest negativity since 2008 and were bounced from that area a month and a half ago.  The market should not see that level of decline.

As investors, we also can not ignore the fact that at current SP500 levels, the SP500 has basically been consolidating for about a year, and the market multiple identifies this.  The SP500 has a trailing PE of high 13.  As the European mess gets cleaned up, and the global economy continues to strengthen, the market multiple will begin to expand, justifying a higher market.

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