The fact that stocks have not catapulted higher on the surprisingly strong nonfarm payrolls number on November 6 has some analysts worried about a Thanksgiving correction, traditionally defined as a 10% decline from highs. Will it happen? Very unlikely.
Equity research firm Asbury Research just released a report referencing six technical charts as evidence that a 10% correction is imminent by Thanksgiving, in other words within the next two weeks. Long-time technicians and other chartists will tell you that technical trading is more of an art than a science, and though some technical readouts can be fairly good indicators of the near future, they have to be backed by fundamentals. Those fundamentals are the current monetary environment.
Right now, the total money supply in the U.S. banking system is increasing, as shown in the Federal Reserve weekly statistics. The rate of increase also has been on the rise each week since August. In the most basic sense, if there is extra money in the banking system and interest rates are zero, that money will be forced into stocks for lack of anywhere else to go. Technical indicators, insofar as they are recognized by commercial traders and create a self-fulfilling prophecy, can strengthen or weaken a given trend, but rarely can they buck the fundamentals for stocks in general.
Meaning, if the dollar supply is growing rapidly, or even moderately as it is now, bearish technical indicators can rarely override monetary forces and trigger a correction. On the same note, if the monetary environment is poor and money supply is not growing, bullish technicals are usually not enough to overcome a simple dearth of money in the system.
On the other hand, when both technicals and the fundamental monetary environment line up in the same direction, be it bullish or bearish, it is a much better and more reliable indication of an imminent major move.
While stocks are currently being bogged down by technical challenges that to a degree are self-fulfilling prophecies, the chances of a significant correction by Thanksgiving are very small. We may see two or three big down days as traders worry about the various shapes of their charts, but those dips are likely to be quickly bought. For now, it looks like there is too much new money in the system for the selling to gain any momentum.
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