• Mild correction is sign of more upside to come
• 1st quarter of ‘08 may be hard on the bulls

In my October 2nd posting I was looking for a market correction starting October 11th and lasting through the 26th. The high in the S&P500 cash index was made on October 11 and the index has since corrected about 3%. I am pleased that, so far, this correction has been mild, orderly, and what one would expect in a rising market. We may have to contend with further weakness through the end of October but, at least for now, very little technical damage has been done. The market continues to slough off bad news, and after the October lows are in I look for one more run to new highs by the end of the year.

The bulls may be facing the perfect storm by the 1st quarter of 2008. If the price of oil simply remains constant it will be trading 80% above year ago levels by January. Once oil reaches this relative level, it has predictive value according to Steve Leeb. In his book, The Oil Factor, he shows that it’s this relative level of oil prices that may cause the markets to drop. Additionally, a large number of variable rate mortgages are due to reset January through March. Higher gas and mortgage payments may be enough to slow consumer spending. Add the fact that there is an important 3.3-year cycle low due at that time and we may see our first 20% correction in five years.

Read the Bull Bear Review (PDF) >>>

Posted by Michael Chapman at 12:00 PM PDT