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Market Correction is Overdue After 45 Days Without a -1% Slide

April 10, 2010 – by Richard Band

This is getting a little too easy! Forty-five calendar days have now elapsed since the Standard & Poor’s 500 stock index pulled back even a measly 1%.

If you were a visitor from another planet, you would be forgiven for concluding that the stock market always goes up. It certainly has seemed that way since February 23, when the market posted its last significant one-day drop.

In fact, according to the statistical whizzes at Bespoke Investment Group, this is one of the longest runs without a 1% “correction” (extending a day or more) since 1990. The most recent previous instance was 42 days from March to May 2007.

What are we to make of this long one-way street? The historical record is mixed. When a lengthy string of low-volatility gains occurs in the early stages of a bull market, it usually means higher stock prices in the weeks and months to come.

But the 2007 example is worth heeding, too. In that case, the blue chip indexes still had five more months before reaching a final cyclical top. Right after the winning streak ended in May, however, market breadth fell apart, with the financial stocks, in particular, lagging far behind the broader indexes.

We’re overdue for another pullback of 5% or more on the major indexes. I’ll be watching carefully to see how the process unfolds. Although I’m not expecting another breadth breakdown a la 2007, we want to be ready if the climate begins to change.

Meanwhile, my advice is to be extra picky about any stocks you buy in here — and don’t be afraid to take a few profits, either, on some of your overextended winners. In today’s market, I consider a stock overextended (and vulnerable to short-term selling pressure) if the share price is quoted more than 6% above its 50-day average.

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