Although the recent pullbacks in the S&P 500 were a disappointment compared to days prior, there are reasons that a pullback is healthy and even necessary for shares and exchange traded funds (ETFs) to recover.

There are reasons to believe that a pullback is actually constructive at this stage of the recovery process, according to analysts. Jerry Slusiewicz for Index Universe says that the current rally has just come too far in too fast of a time frame. While any jump is great, Slusiewicz wonders if it’s better to have a more moderate retracement.

Reasons that a pullback is healthy at this time:

  • Resistance. If stocks continue to climb, technical factors indicate that the S&P 500 will hit considerable resistance at the 875-880 area, or 8% higher than current. Last weeks’ rise of 6% is good, but does not signal a recovery or a new bull market.
  • New Leaders. Slusiewicz says to look for new leaders – sectors such as alternative energy and foreign markets.
  • Commodities and raw materials. Oil and basic materials are on analysts’ watch lists; raw materials will be in demand again if a recovery were to take place. The sector might see higher highs and lower lows if a recovery were to begin.

As of right now, no one can really say whether we’re at the bottom or not. The basic market indicators and trends are the main thing to watch for now. The slight pullback in todays’ market is indicating a good pattern within the main indexes for now, as they pulled back 3% yesterday. Eye the trend lines as your sign for when to enter and when to exit.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.