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Saturday, 26 September 2009

Five Reasons Why The Market Will Moderate

By Matt Phillips

A worse-than-expected report on durable goods sent S&P futures lower early, putting markets on course for a third-straight down day.

But according to the tape-readers over at Ned Davis Research, there’s little reason to worry about a sustained turndown in stocks. “Considering that the economy is now recovering with inflation and interest rates still contained, and with our sentiment and valuation indicators far from threatening, the risk of another bear market is limited right now,” they wrote in a note that fluttered into our MarketBeat inbox last night.

Still, the market is not going to crank like it has been over the last six months. After all, the Dow Jones Industrial Average is up 48.3% from its 12-year close low of 6547.05 hit on March 9. The S&P is up 55.3% since March 9, and the Nasdaq is up 66.1%, according to Dow Jones number crunchers.

Any trader’s gut would likely tell them that sizzling gains like that can’t last. But Ned Davis’ researchers offer five succinct data-driven reasons why we should see stocks level off:

1) There’s a good chance that the bull market has moved out of its first third, when the biggest gains typically accrue. Most likely, the bull is now in its second third.

2) Seasonal headwinds typically impede the market in September and October.

3) The market tends to move higher at a more gradual rate after the ends of recessions. The trend of 1975 has been especially comparable.

4) While stocks are not yet overvalued, they’re no longer cheap.

5) While optimism is not yet excessive, high pessimism is no longer a market positive.

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