Pullback Targets and Opportunities

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Alas, I should have known better as bull markets typically take the stairs up and the elevator down.

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Pullback Targets and Opportunities

Kevin Cook here again for Steve for a few days as he travels...

The pullback really got rolling Tuesday with a 1.7% slide in the S&P and Dow. A few big funds must have flinched after the open and then everybody ran for the exits at once as it became obvious that the S&P's 50-day moving average at 1,372 wasn't going to hold. A test of S&P 1,350 was in the cards, but I didn't think we'd get this close in two days. Alas, I should have known better as bull markets typically take the stairs up and the elevator down.

The question for bulls like me becomes, "Do we start nibbling here now, especially after the Alcoa beat? Or, is this market going to continue to slip lower on Euro-contagion fears and hand us better opportunities?" One way to answer this is to think in terms of scaling into longs on the way down. First, you have to gauge the potential momentum and time frame of this sell-off. Then you have to identify what support levels are in target given that picture.

If you think a worse fear-driven drop is to come, its speed is a big factor. The market could sit for a day or two, and then the elevator resumes its fall. Fear is definitely on the rise not just because of Spain, but also because new longs are losing money and old longs are losing profits. So far, the pullback in the S&P from 1,419 to 1,359 has cost 4.2%. My estimate is that we could see 7-8.5% at the worst, which would target S&P 1,320-1,300.

But I think that unlike the Dow and Russell 2000, which have violated their March swing lows, the S&P will hold support at 1,340. So I would look to add there even more aggressively, but be ready to trade within the range since we likely won't see 1,400 again until May. As I noted here yesterday, when technical damage has been done, it takes time to heal.

It's still a bull market until further notice. And though earnings season probably won't give us many reasons to bounce hard, it will give us plenty of time and chances to buy good stocks on sale. To get you started on your shopping list, I can think of no better guide than the stock screening strategies of Kevin Matras in his Checklist for Picking Winning Stocks.


Best,

Kevin Cook
Senior Stock Strategist, Zacks Investment Research

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