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The Feel of the Correction

May 24, 2010 – 4:52 pm

After a strong pullback in the indexes mostly caused by the news out of Europe the stock market may start to calm this week. That does not mean it will rally but with a 12% correction already in the books it is likely that the correction is nearing its end. Of course that is assuming we are in a correction and not a return to the bear market. A return to the bear market is possible but not probable.

The only major economic stat out this morning was the existing housing sales report for April. Sales rose sharply up 7.5%. The fear is that it was driven by the tax incentive that recently expired thus future sales might be lacking. Also, worrisome was that inventory rose sharply to 8.4 months. That is far below the peak of unsold numbers but the conclusion is that foreclosures are going to continue to put downward pressure on home prices. Finally, almost all areas in the country showed increases in sales except the West. California’s market is not recovering.

This is the correction we have been expecting and wrote about, but the big question is has it run its course? It is going to be a bumpy ride but stock prices are very reasonably priced and earnings are and have been increasing. The economy is recovering as well. Therefore, unless something unexpected happens a correction is all we will have.

Good Trading,

Steve Peasley

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