Is a New Market Shift Coming?

Is a New Market Shift Coming?

2012 so far has been a phenomenal year for the stock market. The Dow Jones recently reached
the 13K mark, which was last seen in May 2008 (it had met the 14K mark in 2007). This boost
came off of a great end to 2011, and now has some people looking at possible pullbacks and
even major adjustments, as this was the level met right before the 2008 downturn. The Dow,
however, is just a small look into the market. It is important to do a whole market analysis before
switching from bull to bear status, or vice-versa.

The S&P 500, which is often used as the market benchmark, has been meeting resistance at the
1.35K mark since 2011, and it is currently at that point. In May 2008, it was at the 1.4K level,
down from the highs around 1.55K in 2007. It is not quite at the pre-crash level in 2008, but it is

The NASDAQ, which some argue is the best index to measure the state of the economy because
all of its companies are producers, is currently near the 3K level. This is above the levels seen in
2007 and 2008, and has actually not been seen since the dot com boom in 1999 and 2000.

So if the economy is producing, should we really be concerned about a correction? The answer
is “slightly.” Investors still remember the pain and volatility that the Greek debt crisis brought
in the summer of 2011, and so investor psychology may persuade them to take some profits,
and there could likely be some small adjustments. As noted earlier, it is important to do a whole
market analysis before worrying if another crash is coming. One way to judge the economy
is how financial companies are doing. In 2007, there was a divergence between the three big
indices and the financial index, XLF. While the market as a whole was in an uptrend, financials
were in a downtrend, preceding the crash that would follow. This was true again before the
summer 2011 volatility. Starting in February, the XLF began a downtrend, while the rest of
the market was in a slight uptrend. This of course was caused by foreign influences, but the
financial companies were still tied to it, and what affects them will eventually affect the domestic
companies that rely on them. For this month, both financials and the rest of the market are
relatively flat.

The recent strong momentum in the market may be over, and it could even be that some slight
pullbacks will happen as investors take the profits. However, there is currently little to no
indication that major losses like those seen in 2008 and 2011 are coming. The situation in Greece
will keep some volatility in the market, but recent news has been more promising than bad. The
XLF is holding steady, and recent reports are announcing that the housing market may have
hit its bottom and may be recovering. The XLF should continue to be watched, and if it has a
divergence from the rest of the market, that would be the time to become concerned.

The market is constantly changing based on news, outlook, performance, psychology, and
many other factors. It is important to pay attention to many of these factors, because what looks
promising one day may not look promising in a relatively short amount of time.

Article by: Kyle Burchert

Posted in Blog

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