In Need of a Pullback

Imagine you are running a marathon and your normal running time is 10 minute miles. For the past several miles you have been running at a 5 minute mile pace. You would need a rest.

Similarly, the Capital Market’s have been running at a 5 minute mile pace for the last several months and they need a rest.  While this analogy may seem strange, Captial Market’s have,  just as a runner has, a sustainable pace at which they can travel. Our current rate of ascent has been extremely strong with the S&P 500 rising almost 40% from the  March 6th low.  This straight line upward is just not possible without a rest. A pullback accomplishes several things:

  1. Allows confidence in the March low as market participants will watch to see how low we go before picking up the pace again (going higher).
  2. Brings in some doubt that the rally is not real. (Everyone cannot be on the same side of the trade, there must be a buyer and a seller.)
  3. Establishes a healthy level for the market as somewhere between our current levels and a lower level is probably close to fair value.
  4. Allows conservative investors an opportunity to buy in at a reasonable level rather than just chasing the current rally.

While it may seem strange coming from us to wish for a pullback, our only desire is a healthy, sure footed, long term market, and a pullback would help establish these objectives. JK

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