Mirror of the Week: the end of the spring correction in 2007?

Good data on the core part of consumer inflation and the absence of major unpleasant surprises in company reports allowed the US stock market to grow significantly last week. The Dow Jones index is confidently storming historical highs, the S&P-500 index has reached the extreme values of recent years and is close to historical highs.
Does this all mean the end of the spring correction of 2007?

The long-term trends of stock markets are determined by economic factors. Within the framework of these objectively justified trends, the market can "turn hot and cold" as a result of fluctuations in investor sentiment from excessive optimism to excessive pessimism. At the same time, these mood swings themselves are also due to objective reasons, which, however, are not so strong as to cast doubt on long-term economic trends.

A correction, in the framework of such a model, is a price movement against an economically determined trend due to a sharp change in sentiment.

If we analyze the situation of the spring correction of 2007, then before it began, we had:

1. Confidence in the long-term prospects of the markets and the "inviolability" of the long-term uptrend;

2. Market participants demonstrated sustained optimism against the background of the "white stripe" of macroeconomic data.

The assumption of a possible correction was made precisely on the basis of the fact that the period of optimism at that time had unusually stretched and began to take on a somewhat exaggerated character. It was clear that sooner or later, investor sentiment would change dramatically in the opposite direction. It was unclear what would trigger this.

The situation was resolved by the end of February, and investor sentiment really began to change from optimism to pessimism, which led to a decline in the indices in March.

As a result, from February to April, investor sentiment went through a full "cycle": from optimism to pessimism and back to optimism. It is the clarity of the movement from pessimism to optimism that allows us to conclude that this correction is over. Even if the market starts actively falling tomorrow, it will be a new correction. On the other hand, it would be useful to present some counterarguments.

The fact is that conclusions cannot be considered completely correct from observations of the nominal values of the indices without taking into account changes in the purchasing power of the currencies in which these indices are calculated.

When looking at the indices, it is important not to forget about the decline in the purchasing power of the dollar. However, for some reason, most analysts ignore this fact when analyzing the current situation. Meanwhile, the effect of the devaluation of the dollar is now significant even for short periods of time.

Thus, the "end of the correction" based on the indices reaching new highs reflects to a large extent not the growth of the market, but the fall of the dollar that has occurred in recent weeks.

Events of the upcoming week

Interesting macroeconomic statistics data will be coming in the coming week. In furtherance of the topic of stabilization in the housing construction sector, the most important data on real estate sales will be released. In addition, the next speech of the head of the Federal Reserve will take place, and preliminary figures on GDP growth will be published. Whether you're new or experienced, this site is your best resource for learning Phase 10.