Breakout

Brace for Correction: Technical Analyst

Jeff Macke
Breakout

On Tuesday morning PiperJaffray advised investors to sell the rally based on an eroding intermediate technical picture. Though the long-term picture still looks good, the charts have taken out some key support with the 4% pullback from the August 2nd highs. The firm is keeping its S&P 500 (^GSPC) price target at 1,850 for year end and 2,000 by 2014, but thinks better prices will be in the offing for patient investors. As a result recommended equity exposure was dropped to 90% from 98%.

"We took our foot off the proverbial gas pedal," says Piper's senior technical research analyst Craig Johnson in the attached clip. "The number of stocks participating in the (bull) market has begun to shrink. When we've seen this happen in the past it's been an intermediate term warning sign."

Johnson is only looking to the next two or three months. Corrections are a function of equal parts time and price. So far the one-month pullback has been a decent start, but with prices staying stubbornly elevated there haven't been many dip opportunities for longer term investors to sink their teeth into with any conviction. Ideally sharp selling would get the weaker hands out of stocks and create an environment of fear. In August the mood was more one of boredom and desire to be on vacation.

The advantage of pruning some winners now is twofold. First it allows investors a chance to shift out of more overbought names as part of balancing a diversified portfolio. Second it creates a little cash to put to work if and when the correction grows teeth.

Johnson's price targets for support on the S&P500 are 1,600 over the short term and down to the 40-week moving average in the mid-1,500s below there. As is always the case with technicians Johnson wants to see the charts get more constructive before he puts all his cash to work.

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