The triple digit loss in the Dow today is not a surprising development, and in some ways should be welcomed as a healthy correction. On a technical basis alone, the S&P 500 has risen almost 80% off its March 2009 lows, with only minor corrections along the way. In fact, in the past 2 months, the S&P 500 has gained over 14%, with almost three quarters of the trading days closing on the upside (see graph below).

One of the financial indicators I follow closely is investor sentiment, which is a very strong contrary indicator to market direction. In other words, when investors as a group get too giddy about the market, it is usually a cause for concern. I regularly watch sentimenTrader, one of the best websites that tracks these trends (they have a shorter term perspective than the Roen Financial Report, but their information is still very useful). The folks there yesterday wrote “…we saw more extremes in our indicators than just about any other time in five years. The number and variety of extremes are too numerous to mention, and we had to leave many out.” 

While there are real concerns in today’s economy, I feel the good news in the economy outweighs the worries and we are toward the early end of a positive business cycle. This type of stock market correction is likely a necessary downturn in a positive market ahead.

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