For stocks to rekindle the long journey higher, they have to take that first
small step. It wasn't clear what it would look like a week ago, but after last
week the major indices have dropped some key hints about where the short-term
lines in the sand are. For the S&P 500, the big line to watch is 1172 – a
level the market has jumped above in early Monday trading. The reason it's
important is simply that on a closing basis that level has contained the index
for better or worse all week after last Monday's decimation. Until last
Friday, that is, when the index closed above that mark. That sets a bullish tone
for the coming week. Just don't count on it lasting forever. It's a notion
that raises an important question, though: Have we really burned off all the
excess we needed to? I believe the answer is yes, for two reasons: The first one
is that, from its high to its low, the S&P 500 bled off 18% of its value. The
average corrective move is on the order of 12% to 16%, and most such moves
don't kill bull markets. As harsh as it felt, this decline wasn't anything
historically unusual except for the speed of it, which was more a function of
nervous investors than of earnings results or economic strength. Either way, it
was big enough to dole out a proverbial 'reset' of attitudes and price
action. The second reason I suspect we've already been through the worst of
any needed pullback is most readily seen on charts of the Dow Jones Industrial
Average and the S&P 500 from last Friday. Not only have the recent losses been
harsh, but the daily ranges over the past four days have been enormous as well
as easily reversed. Though it can be overwhelming at that time, this extreme
up-and-down action is ultimately beneficial in that it shakes off all the weak
bearish and bullish (mostly the weak bullish) hands like a dog shaking water off
its fur coat. With all that antsy trading money on the sidelines, even the
smallest of bullish catalysts will draw it back in. That said, there's a
caveat.
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