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The return of Hong Kong Fooey


Hyyyyy Yaaaaaa. Remember our Kanine super hero? He may be back as the equity market continues on its path with another quick visit from our master of martial arts, disguised as a janitor. As the equity market corrects, there are any number of concerns that will emerge to explain it...most of which are likely to be more based on fear than fact. In other words, much like our bumbling super hero, the wind up punch should be much more powerful looking than the pain truly inflicted.

Consolidation Has Already Been Underway. We continue to believe that the equity markets are in a consolidation period that likely began in the middle of October. In our view, the good news is the major market indices are past the half way point of correcting the excesses of the post summer move higher. The bad news is the second half of the process is where that feeling of "maybe it is more than a correction" comes from as selling picks up and stocks drop.

Time and Price. A market consolidation period is typically comprised of time and price. The market has been churning higher over the past month, and now looks like the time for the price deterioration component to kick in (Exhibits 1). By definition, investors and traders only know that a drop is a correction in an ongoing up trend after the fact, or it would never take place. Typically, "key" technical levels must be broken and comments regarding the "end of the bull" begin to dominate the airwaves before a solid correction runs its course.

Exhibit 1 - A pull back toward SPX 1000 would likely worry a few

Source - Baseline

Trend Too Identifiable. There is no doubt in our mind at some point there will be a nasty side to such an identifiable uptrend. Way too many people have it identified, quoted it and commented on which moving average the major market indices should pull back to. Once a nasty side happens, as it did when the S&P 500 (SPX) broke the summer time trading range to the downside in August, we must defer to our longer-term thesis and what it suggest for coming months.

History Suggests a Temporary Decline. Despite our view that further correction is likely, on Friday, we wrote an update to our bullish Upside Ahead? report (07/31/03) because we wanted to reinforce our belief that the correction should be limited and likely sets the stage for further broad equity gains once complete. In Even More Upside Ahead? (11/14/03) we outline how further gains in a market with this type of historical momentum (only 8 times since 1970) take place AFTER reaching a long-term overbought condition, which recently happened.

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Welcome Adam and Congrats Brian...great news for everyone involved!!!!
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