Are you ready for 7% pullback ????

Market have been on a roll since March low of 666 in S&P 500...we went to 996.68 two trading days ago...this meant that we were UP 330.68 or 49.65%.....in a short 5 months.....these are lofty gains .....which is not possible to sustain.........

YES...there has been many pullbacks along the way but they were "minor pullbacks".....

First sharp pullback started in June when we hit 956.23...then we went down to 869.23 a sharp pullback of 87 points in less than 3 weeks..this was a 9.01% pullback.....lot of equity was lost in this "sudden reversal"......

After that we went higher by another 40.45 points to 996.68 which was an UP move of only 4.23%.......

SO...we went down 9.01% and moved back UP 4.23%.......this clearly paints a picture of Risk/Reward ratio being challenged......

Based on "overbought conditions which was reached on Thursday intraday"...we COULD be setting UP for a 7% drop in indices OR a serious test of 50 DMA......which IS sitting @ 927.35 a potential DROP of 60.13 or 6.48%......generally when market test any support it has a tendency to pierce through...thus a 7% drop is quite POSSIBLE......

The trouble with any RETEST...technicians will come out of woodwork and will claim that we are going down to test 200 DMA which is sitting @ 871.17 which is 116.31 points away or 11.8% downside risk.....

I personally do NOT see us going to 200 DMA ...BUT MAY come close to it.....so a correction of 6.48% to 10% is very much PROBABLE.......

So why do I believe that a pullback IS imminent..here are few "logical" reasons :

- Markets are @ loftiest level
-Earning season is over
-Many improvement in economy is priced in
-Asset allocation is mostly done
-Many stocks are extended based on RSI
-RSI in S&P is 71.27..need to come to "below 50"
-No real catalyst in August

SO...the real question IS ..how do we position in the market???

-Reduce exposure substantially..which I have already done
-Do covered write on your portfolio
-Short extended stocks/indices or buy puts in them
-Suspend further buying until support is found

Long term investors have nothing to worry as this market will be lot HIGHER by end of the year....targets for S&P 500 is 1250 by www.stockcharts.com

SO..no matter what you do..make sure your comfort level is there.....as corrections are short & swift but very painful...high beta stocks do take a much HIGHER pounding on any pullback.

BLOG does NOT give buy or sell.

Saleem