The market is bullish because it is bullish! Of course this would not get you very far in a job interview for a position as a conventional market strategist. But perhaps the more unconventional would express interest. Has it not occurred to anyone that everyone got it totally wrong last year (albeit 95% of the highly paid economists/analysts/strategists/traders/fund managers that I have talked to or conversed with)?
Let us not forget that this time last year if you had said that the average listed stock in the US would close about 65% higher by year end you would have been marched straight off to a big grey building lined where they perform strange experiments on the emotionally disturbed! In any event, I don’t see anyone changing their method of analysis………perhaps man just cannot accept the unknown without some visionary picture. We think traders (those who want to make money from the market rather than those who merely want to sound intelligent) could do a lot worse than adopting the approach of listening to the market for clues as to what it wants to do.
With the much underrated Value Line Index trading at multi-week highs, 88% of stocks listed on the NYSE trading above their 200 day moving average, the linear behaviour of the NYSE Advance Decline line and the NYSE New Highs New Lows Index what are the equity market bears seeing that we are not? As far as bull trends go they don’t get anymore healthier than this! Perhaps the eternal bears can make an argument for equity markets being overbought? Yes, that is true……but we have seen plenty of markets remain in overbought territory for months at a time.
What do we predict? Nothing, we don’t have a clue, and had even less of a clue this time last year. But last year we did note that, given the way markets were then behaving, the S&P 500 is highly likely to close materially higher rather than merely lower. We don’t know what the future holds (by default we cannot or otherwise our actions would alter the “future”). We do know that markets trend, and this is a strong upward trend. Lets ride it until there is enough evidence that it is about to come to an end! It sounds all so simple doesn’t it…….but because this involves not having a view few will follow it!
OK so what sort of evidence are we looking for to signal that the market’s uptrend is about done? In essence we are looking for divergence between market internal indicators and the performance of the major market indices. More often than not the charts above will start to turn down before the likes of the Dow, S&P and Nasdaq do…..this action is usually supported, if not preceded by a deterioration in the junk bond market.
