• To keep recent stock market gains in perspective, a buy and hold investor would still need to make 42% just to get back to break even relative to the 2007 market highs.
  
• At this stage of the economic cycle, investors tend to become concerned about:
  
  • Higher interest rates
    
  • The gradual reduction/elimination of stimulus programs
    
  • Slow job creation
    
  • The sustainability of the economic recovery
    
  • Asset valuations
    
  • Debt levels
• These concerns can lead to significant market corrections within the context of an ongoing bull market. If the S&P 500's currennt rally stalls below 1,115 or 1,135 (now at 1,105), the odds of a more prolonged correction will increase.
  
• The U.S. Dollar's recent strength may also contribute to a corrective process.
  
• A move on the 10-year Treasury above 4.0% would also increase our concerns. It currently yields 3.66%, well below alarming levels.
  
• If the CRB Index (physical commodities) turns down before it reaches 280 (at 274 now), the odds would increase for a further correction in commodities.
  
• Silver recently made a concerning lower low, something we are watching closely.
  
• The VIX or the "Fear Index" is currently flashing some caution signals.
  
• Market breadth (advancing stocks vs. declining stocks) remains sound for the time being.
  
• In terms of the economic and market cycles, the parallels between 2004 and 2010 are strong. One significant, and potentially bullish difference, is the Fed. The Fed raised rates in June of 2004. In the current cycle, rates may remain low for quite a bit longer than the 2003-2007 cycle.
  
• It is possible that the coming months will continue to be frustrating. If that is the case, many investors will let fear get the best of them and decide they have had enough, as many did in Q2 and Q3 of 2004. Unfortunately for those who sold out with no intention of reentering, the gains from the lows of 2004 to the bull market highs made in 2007-2008 were significant (see table below).

Additional comments can be found in Short Takes.

Chris Ciovacco
Ciovacco Capital Management

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