Expect Short-Term Rally Before Final Correction [Dow Jones Industrial Average(INDEXDJX:.DJI), SPDR S&P 500 ETF Trust]

bearbull21Chris Puplava: The markets have stabilized and remain in a short trading range with the bulls and bears fighting it out. Various readings suggest we’ve likely seen a short-term bottom and may rally into next week; however, we haven’t quite seen enough fear in the markets to suggest the corrective phase is over. What this means is we are likely to see a relief rally next week to work off an oversold condition but there remains a good chance the market will retest its recent lows and by that point fear levels should be high enough to suggest a more meaningful bottom. Given the long-term trend and momentum still remain deep in bullish territory, this is likely just a corrective phase in an ongoing bull market.

Follow the Money – Weekly ETF Flows

When looking at inflows and outflows into major exchange traded funds (ETFs), we can see this week was clearly a risk-off market which showed the largest outflows from the S&P 500 ETF (SPY) at $9.1B followed by $3.3B in outflows from the iShares Emerging Market ETF (EEM). Financials (XLF), Industrials (XLI), Junk Bond (HYG), and small cap stocks (IWM) also saw meaningful outlows and are all considered riskier areas of the market. On the flip side, inflows showed a divided market as investors went both long bonds (TLT) and short (TBT) in large amounts. There were also inflows into small cap stocks (TNA), financials (FAS) and REITS (IYR), so overall a mixed message when looking at inflows while outflows were more skewed towards a risk-off stance.

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S&P 1500 Member Trend Strength

As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 75.2% of the 1500 stocks in the index have bullish long-term trends. The market’s intermediate-term outlook slipped to neutral-bearish at 49.8% this week from last week’s 71.6% reading. The market’s short-term trend remains in bearish territory at a 30.8% reading. What we have is a short-term oversold condition with a neutral intermediate-term outlook in the context of a bullish long-term trend.

* Note: Numbers reflect the percentage of members with rising moving averages: 200-day moving average (or 200d MA) is used for long-term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short-term outlook.

The most important section of the table below is the 200d SMA column, which sheds light on the market’s long-term health. As seen in the far right columns, you have 75% of stocks in the S&P 1500 with rising 200d SMAs and 72% of stocks above their 200d SMA.

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