How to spot corrections
Spotting a forthcoming correction is notoriously difficult but there are often clues lurking within the indicators.
Take the Hi-Lo-Grometer for example. I had been watching the highs decline steadily from November 2010. At first I thought that the decline was pointing to the drop below 5600 in March. However, the peaks continued to fall in May and July i.e. a trend of over 6 months.
Looking at the last time this happened when the Hi-Lo-Grometer declined between
October 2009 and May 2010, the FTSE 100 fell from 5800 to 4800 in the space of
3 months. It took a total of 6 months for the market to recover its former peaks.
Note that for a correction to recover quickly, the US Treasury Yield indicator has to be green or light green; if it were amber or red this would be indicating that we would be entering a bear market.
The Hi-Lo-Grometer was also useful for tracking the bear market from August 2007 to March 2009. Observing the indicator you will see the peak lows rising to their zenith in October 2008 and then declining thereafter. At the time I was wondering whether the rise and falls in the lows was going to be symmetrical but it didn’t turn out that way.
So where are we today? The FTSE 100 was trading above 6000 in July 2011 and has so far fallen to around 4900 – a larger fall than in 2010. Given that it should take about 6 months for the markets to recover, January 2012 should be the target date.
Given also the effect of Santa Claus rallies, I would expect this date to be brought forward by a month. And, given past history, we are due a bumpy ride before then with the possibility of new lows forming in the September-October timeframe. I will be watching the peak lows on the Hi-Lo-Grometer and will keep you posted.