S&P's mild decline
A correction in the indices has clearly now arrived, as I see it. So far, the FTSE 100 has shed as much as 5.3 per cent over seven trading sessions, while the S&P 500 is off its record highs of late May by 3.8 per cent over seven days. Japan's Nikkei 225 - which has gone up like a firework this year - has suffered a near-bear market drop of 18.1 per cent inside just eight days.
I remain convinced that this a correction within a bull market rather than anything more serious, even in the case of Japan. I define a correction here as a move of at least 5 per cent and less than 20 per cent. It has been some time since we last experienced one of these. The S&P and FTSE's last drop of this magnitude was around 127 trading days ago, while the Nikkei's was some seven weeks back.
Cycles on Wall Street
The question now is what degree of correction we get. I read this week an excellent report by Richard Mogey, the world's leading expert on financial market cycles (www.cmffinvestments.com). "We and the cycles expect a correction of about 7 per cent now," he writes about the S&P 500. That seems a pretty credible prediction to me, not least because of the source, whose savvy market calls I've followed for several years.
Richard's forecast fits in nicely with my view of what could happen in the case of the FTSE. Fourteen corrections of at least 5 per cent have taken place during the main periods of money-printing since March 2009. On average, these moves have seen the index retreat by 6.8 per cent over a period of 15 calendar days. The daily relative strength index (RSI) has typically unwound during these periods from around 60 per cent to 41 per cent.
FTSE less stretched now
Evidently, the FTSE has done most of this already. Its retreat to its 55-day exponential moving average has already dragged its daily RSI down from an eye-watering 82 per cent to a modest 44 per cent. I would stress that this could easily continue without damaging the uptrend. A drop into the 6350 zone would make sense, while I'd be delighted buying a rebound after the RSI reaches the low 30s.
I have to see Japan as a buying opportunity in the making, too. I am not especially worried by the violent retreat in the Nikkei index. The market went up by a stunning 85 per cent between 16 November 2012 and 24 May. Its weekly RSI had been massively and stubbornly overbought for weeks. A decent retreat is hardly surprising against this backdrop. Indeed, it is desirable from the point of view of a further leg upwards.
Nikkei's near-bear market
I got an email from a well-known private trader on Tuesday telling me that he had quite a lot of put options on the Nikkei. Citing the overblown enthusiasm for Japan among retail punters and journalists, he writes: "I think we go down to 11500-12000 in the next few months." Even if he's right - and he's got a great track record - I'll be looking to buy when the index bottoms out.
