A Change In Character? Or Just Profit Taking?

For 2 months now, the market has viewed all news events as positive. The rally has endured even as less favorable economic reports came out, as even bad news was greeted with buying, and the worst was viewed to be behind us as investors.

The last couple of days has been a bit different, as the market has sold off on some news reports. This morning it was the retail sales report. Yesterday, the market rallied back into the close to mitigate its early losses, but how many days can that happen?

The Nasdaq has rolled back over below its 200-day average, and the S&P 500 is nearing its uptrend line that has held since the March lows. To be sure, the market had gotten overbought, and many investors are looking for a pullback to refresh things. That is what makes this juncture interesting.

A 3-5% pullback is definitely warranted, and right now the SPX has pulled back roughly -4.4% from its highs last week. Pullbacks are healthy. The true character of this nascent bull rally will be revealed not in how fast it rises, but in how it handles the pullbacks. Bull markets are defined by higher highs and higher lows. So far that has been the case, but we need to see that if a larger correction ensues, that the market holds above previous lows.

In 2003, investors were also anticipating a 10% pullback, but it never came. The market continued to stair-step higher that year, and investors had to step up on every slight pullback and consolidation if they wanted to participate in the new bull market. Could the same thing happen this year? I think what we've learned over the last 18 months is that in the market, anything can happen.

Trading comment: I mentioned last week that SPX 875 acted as resistance several times until it was finally penetrated. So that level should now act as support on the first trip down. The SPX is currently at 888, getting close to this support level. I will look to add long exposure as we near this important area.

Yesterday I added the global materials etf (MXI), as I think those companies should benefit from the global stimulus efforts and the reflation attempts in China in particular. I also took some trading profits on MOS, and added a trading long position in AMZN. Tomorrow, URBN reports earnings, and I will have a roundup of the conf. call later that day.

long AMZN, MOS, MXI, URBN