3-25-2012

The volatility index (VIX) is now above the 2011 low and has been consolidating, NOT blasting off to the upside.  I believe breaking the 2011 low will indicate the next big rally if that happens.  Moving above the Feb. low will indicate a deeper correction for the SP500 Index and other stock markets for that matter.

On the positive side, the small caps are bouncing from support.  On the negative side, Treasuries are rallying again.  China is very weak and is flirting with some support.  If it breaks there, our markets may ease back further as well.

There is a feeling among many Bears that we are still going to have a significant rally into year end, but “boy oh boy, we really need a correction here” – more than we have had to date.  What could bring the correction would be failures in the earnings season about to hit the calendar.  As I’ve mentioned, there are those like the Economic Cycle Research Institute who feel the economy is going to go into a mild recession and it will get worse if oil/gas prices go sky high.

The other big issue is where money from individual investors goes from this point on.  Over the past year it has continued to LEAVE stocks and enter bonds, entering a bubble that Warren Buffett has warned against.  The assertion is that the next rally is going to be driven by a shift back from bonds to stocks.  This will NOT happen if bonds continue their recent rally.  Watch the Oct. low in bonds.  If that breaks, stocks will benefit as long as rates do not go sky high indicating high inflation levels.  A gentle rise of rates will likely be tolerated, but not a rapid, huge increase that would shut down the housing market.

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