Tuesday, March 27, 2012

March Market Update: S&P 500 Breakout?

Mid March was an interesting time for the stock market. We were finally able to cleanly break through previous highs of 2011 around 1370 on the S&P 500. As I type this now, we are sitting at a comfortable 1412.52.

This is a significant step because we saw a similar event in 2010, when markets swooned from May until September.  When the April 2010 highs of 1220 were finally retaken and exceeded later in the year, the S&P 500 marched without abandon to 1345 (10%) before a correction occurred.

Am I saying we will move 10% from 1370 to 1500 this time? No, but there is certainly the possibility. I think we may have already seen the minor correction in early March, when the market dipped as low as 1340 from 1375 before rebounding.

One troubling indicator is the Dow Jones Transports. Dow Theory indicates that a divergence between the Dow Jones Industrials and Dow Jones Transports should be taken as a potential warning sign. On an absolute basis, the transports exceeded their previous high of 2012 of 5384, but only barely (5390). They are still far from their 2011 highs of 5628. Currently as I type this they sit at 5276.

I will continue to watch the Dow Jones Transports as a critical indicator in the following weeks. In the short term, I want this index to at least take out the February highs of 5384 cleanly. A move above 5400 would give more conviction to this March rally.

Disclosure: My personal stock portfolio is 96% long, 4% cash

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