Wednesday March 28th 2012
Sentiment Creeping Higher...Market Bull Alive And Well....
by Jack Steiman www.SwingTradeOnline.com
People keep asking whether we are still in a bull market, based mostly on the fact that fundamentals don't seem to support a bull run of this magnitude. Housing stocks are on fire, yet, foreclosures keep rising with the overall housing starts not in very good shape at all, there’s talk about how China and Europe just had very poor manufacturing reports, that Europe is clearly in a recession, and China has begun a pretty rapid descent lower. So how could anyone think we're in a bull market? The answer remains the same today as it has for a long time. Ok, fundamentally things are not in bull territory. No argument about that. The market does, however, have an accommodative Fed Governor and very low interest rates. That's the two necessary ingredients for a bull market. Plain and simple.
What can take this away?
There could be a sudden and unexpected rise in the interest-rate cycle, due to the Fed finally grasping that he's sending the United States straight into hyper-inflation, a sudden financial shock to the global system, due to events in Europe, as well as a dramatic decline in the recently improving economic reports. There’s a big report coming up early next week. (More on that later.) If we see the United States suddenly dealing with poor manufacturing reports, and poor job creation to go along with other reports, then things can turn quickly. Not right away as many people may think. As well, many people will try to convince themselves and others that it's just a one-time event, and it won't continue. It seems that there would need to be repeated bad news on the economic reports, before the market would lose its bull status with any force. It can happen. If Europe and China started having trouble, so can we, but that doesn't mean it has to happen. It appears it won't happen here. Time will tell, but unless any of the above take place, expect the bull to move ahead in the future. No one knows how long, of course, but the future still looks solid.
Strong manufacturing equates to strong job growth, or at least no further loss of jobs. It tells us the truth behind the scenes. We gain insight about whether our economy or world economies have a chance to thrive, or if the big red flag is upon us regardless of what's taking place in our stock market. We have been hanging around the 50 to the recent 53 level on the ISM Manufacturing Report. We started off at 50.0 for a few months, which is the dividing line between economic growth and recession. Europe was supposed to come in at 49.0 the other day, but instead, it came in much lower than that. Yes, 49.0 would still be recessionary, but at least it would have suggested things were improving. Not to be.
China’s number was well below expectations, but still above contraction. Not good as it disappointed, but no recession yet. The key for the U.S. is to see the number continue to pull away from 50.0. We've slowly moved towards 53.0, but can we pull away further, or will we see the number pull back in. If it does pull in, that could be the catalyst to get the market to finally have some form of a correction long overdue. The Fed watches this report with great interest and formulates his monetary actions based upon it. We'll gain a lot more insight thirty minutes into the trading day on Monday, folks. Tune in for the excitement, and some truth about where things really are fundamentally.
Sentiment is becoming a little bit of a problem here. It's nothing to be concerned, or worried, about at this point, but it should be on everyone's radar screen. The bull-bear spread has shot up in the past two weeks to 28% more bulls than bears. When it gets to 30%, there’s a problem. Not necessarily the end of the upside, but a small problem. When it gets to 35%, the red flag is flying in your face saying get basically out of long plays and get to the sidelines. It's not a bear market event, but it is an event that says a significant pullback is very close at hand. It can get to 405 on the spread, but historically, when you get to 35%, more bulls to bears, you are in big trouble with regards to sustainable upside action, with the likelihood being the market is about to get smoked a bit. For now, it's still neutral, but worth monitoring as the weeks move along.
Massive support is at 1370 on the S&P 500, and this needs to hold, but a breach and some fear wouldn't be a bad thing. The RSI's on the weekly Nasdaq, NDX, and PowerShares QQQ Trust, Series 1 (QQQ) charts are over 70. It's not good to see the weekly charts print 70 RSI's. The S&P 500 is near 67, and getting very close to 70. Daily charts can get a bit more overbought when there are 70 RSI's, but when the weekly charts join in, we need to be aware that this, too, is telling us some selling can't be very far away. 1414 is resistance. 1440/1450 follows after that. The bull is alive and well, but due to some sentiment issues getting close to a problem, and with weekly charts at, or near, overbought, the risk for upside is starting to increase.
Again, don't forget the bull is with us!