Both the Bulls and the Bears Can Make a Decent Case In This Market

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Decisions About This Market May Hinge On Investors' Time Frames And Little Else

The fundamentals are fragmented. The public is polarized. And the overwhelming opinion is that stocks should roll over and crash. That suggests that an upside surprise is more possible than many expect. The real question is how much longer stocks can rally and where the fuel for another up leg will come from?

The take home lesson from the current rally in stocks is that easy money and low interest rates are still huge boosters of stock prices. Think about it. GDP is flat. A return to "normal" payroll taxes seems to have sapped consumer credit. The political landscape is bleak as the country faces a sharp axe of budget cuts in March. And stocks are still going up.

If that's not the proverbial Wall of Worry, then what is, right? So we're left with the notion that we've had for some time. This is a momentum market. It seems to want to move higher still. And as with all momentum markets, things will end badly. But when will that be?

If you consider the fact that corporate insiders and the so called smart money is selling, consider that the little guy just started buying. That means, that if history is any guide, this could last a while given the fact that the vultures have been buying for five years and the public has been hiding in bond funds for the same time.

That means that in order for the stock market to crash and burn, a large portion of the big guys have to sell large portions of their holdings to the little guys, who are under invested. That could take some time. And it could push prices significantly higher, perhaps over a few short months or sooner.

But here is what we're seeing. CNBC is writing articles about selling stocks. The bears are very loud too, calling for the end of the world. And stocks keep moving higher, especially after they fall for a day or two. That's buying on the dips. That single fact tells us that there is still some up side left.

Are we frightened to death about this market? You bet. But fear is the fuel that sends bull markets to unexpected heights. Hang on for the ride. There seems to be more coming.

An alternative, and just as likely view is that we are seeing a top being put in place and that it's going to take a couple of more failed pushes to new highs to make things roll over. That's plausible. But, based on what we saw at the end of last week, it's not a done deal yet.

Here is a summary of the charts and what they're telling us. The overview is that the indicators are mixed. We are using the Dow Industrials instead of the S & P 500 in this analysis because the situation is a bit clearer on this chart. But it holds up quite well for the S & P 500.

indu 8 feb 2013
Chart Courtesy of StockCharts.com

The Dow Jones Industrial Average (INDU) is moving sideways. There is resistance basically at 14,000 or so. The index is well above its 20, 50, and 200 day moving averages. Thus, we are in short, intermediate, and long term up trends.

But there are some interesting divergences here, which suggest that stocks are losing some of their upward momentum. The RSI Indicator (top of the chart) was very overbought by mid-January (green shading). Since then it slipped into the neutral zone and is trying to turn up. Notice, that the second peak in the shaded area is smaller than the larger peak that precedes it. This is a sign that momentum has lost some of its thrust. A likely scenario is that the current upward thrust of this indicator will fail and that the market could move lower.

At the bottom of the page, we have the MACD and the MACD histogram indicators. The histogram (blue bars) are confirming the lost of momentum noted in the RSI. Note that the most recent peak in the histogram is lower than the previous peak. Also note that the histogram bars are now below the zero bar. These are both signs of momentum loss.

The Nasdaq Advance Decline line (NAAD) could be making a triple top. Last week we noted that the indicator might have been making a double top. But that dip turned back up on Friday. A new high over the next few days would cancel the multiple top scenarios. One thing is certain, this indicator has yet to flash a negative signal since its most recent turning up.

naad 11 feb 2013
Chart Courtesy of StockCharts.com

We continue to keep an eye on where the money flow for the stock rally is coming from. A significant amount of it seems to be coming from the bond market. That's illustrated by the relationship between bond prices (lower line) and stock prices, as in the S & P 500 (SPX). Bond prices may have rolled over again on Friday as the S & P moved higher. It's interesting, though, that bond prices are off of their recent lows. We'll have to see what happens if those lows are reached again. If a new set of lower lows for bonds does materialize we could be in for a fairly fast run up in interest rates. That would be a significant new dynamic.

spx 8 feb 2013
Chart Courtesy of StockCharts.com

The Nasdaq Hi Lo line (NAHL) remains unchanged in its trajectory remaining in bullish mode. The line continues to make new highs, as money keeps moving into stocks.

nahl 11 feb 2013
Chart Courtesy of StockCharts.com

Conclusion

The technical details, when added to the overall fear in this market paint a mixed picture.

From a sentiment standpoint, this market could go higher. But when you look at the technicals fairly closely, you can make a case for stocks entering a period in some kind of consolidation mode. There is also the relationship between bonds and stocks to consider, which may be nearing some kind of major decision point. If interest rates begin a sustained move higher, we could be in for some unpredictability.

So we are left with a difficult decision about buying or selling. From a short term trading standpoint, this is a good market to stand aside. From an intermediate term standpoint, it's a good market to trim some positions, but to stay with if your holdings are working. The long term is way too unpredictable.

We are not changing our overall outlook. We remain vigilant but have to stay with the trend for now. We are aware that the rally could end at any time.

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