(01/20/11) A Pullback—But Don’t Panic

I think we’re looking at a pullback in US stocks. A pullback in my book is about 5%. It’s less than a correction, which is a drop of 10%. (Please note I’m talking about US stocks only in this post.)

The reasons why I'm expecting this correction are numerous:

An overbought market that’s ripe for some profit taking after a long rally

Worries about a slowdown in China as that country struggles to get inflation under control

More squabbles among the members of the euro zone on how to fix the continuing euro crisis

Good but not great earnings reports (and therefore disappointments) in the financial sector

A weak report on housing starts that reminded investors that sector isn’t out of its slump yet

I don’t see anything there that signals the end of the world, do you?

And I think that in the US markets—I stress, in the US markets—this is likely to be a relatively contained pullback. One of the strongest reasons to believe that, in my opinion, is the relative strength of the investing story for the United States over the next six months or so versus other global markets.

Think about it: Economic growth is picking up and interest rates are on hold in the United States for the next six months, anyway. In China, Brazil, India, etc., economic growth is likely to moderate (to a rate still way faster than in the United States, I grant you, but it’s the deceleration that counts) and interest rates to rise over the next six months. Is it a surprise that Wall Street strategists are telling their clients to put money into US stocks and lighten up overseas?

How big is the US pullback likely to be? I’m not a technical analyst and I don’t even play one on TV, but this is how a technician I respect sees the pullback right now.

Today on StockCharts.com, John Murphy bracketed the market like this: The Standard & Poor’s 500 looks like it’s headed below its 20-day moving average at 1270. (In fact, the index moved below that level briefly this morning.) If it closes below that level, we’re likely to see a correction that will take the index down to its 50-day moving average at 1237.

That’s about a 3.4% drop from the S&P’s level at 1280 as I post at 2:30 pm in New York.

All this is subject to change, of course, but this is what the US market looks like to me right now.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio here. I’ll have the fund’s portfolio as of the end of December posted on Friday, January 21.