Caution: Crowd Turns Wildly Bullish

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The following is an excerpt from Richard Russell's Dow Theory Letters

"The way to get started is to quit talking and start doing." Walt Disney

I just went through the latest issue of Barron's. You can read the various articles any way you like -- they can be interpreted as bullish or bearish.

But what interested me more than anything else was the fact that the D-J Transportation Average has surged to a new all-time high of 5574.04. Obviously, the new Transport high was not confirmed by the D-J Industrials. Which leaves us with the crucial question. Will this non-confirmation by the Dow lead to trouble -- or will the Dow, in its own good time, catch up with the Transports, and record a new high of its own, thereby erasing the flagrant non-confirmation? Ordinarily, I would favor a negative turn of events stemming from this primary non-confirmation. But today, I'm going to remain neutral. First, the number of distribution days have contracted, mostly by way of falling off the list due to age. The NYSE Composite continues to look strong, holding near the new high it recorded during the first session of 2013.

nya 11 jan 2013

Next, the Wilshire 5000 broke out to the upside and is above both of its moving averages. The Wilshire tracks over 6,000 stocks, most of the actively traded issues on the US exchanges.

wlsh 11 jan 2013

GDOW, the "global Dow" has gapped higher and it too is above both of its MAs. The MAs show a golden cross back in October although RSI is warning of overbought.

gdow 11 jan 2013

And most important, how does the Dow look? Below we see the Dow pushing into overhead supply in the 13000s. The 50-day MA has dropped to just above the 200-day MA, and then moved higher, thus avoiding a death cross, which strikes me as constructive.

indu 11 jan 2013

Before I exit, let's take a look at Apple, the stock that some analysts thought would be the first stock to go to a capitalization of $one trillion. Let's see, we have a death cross in the two moving averages, with Apple fluctuating below both MAs. The histograms are contracting towards zero. And we see a series of declining tops, a sign of ebbing upside momentum. Uh oh, Apple just broke below 500 this morning. I'll tell you the truth -- I'm not going to buy it.

aapl 14 jan 2013

And then we have this headline below from the January 13 Financial Times. I don't like this from a contrary opinion standpoint! Can a wildly bullish crowd ever be right? I don't think so, so please dear subscribers -- be exceptionally cautious!

Billions Pumped Into Global Equities

"Investors this week poured the most money into equity funds in more than five years, as global shares surged and a compromise deal on the US fiscal cliff boosted confidence."

So confidence is riding high as the Transports hit a new record high, and the Wilshire gaps higher.

With the new non-confirmation in place, and investor sentiment white hot, I'm left with nothing to go on but my own intuition. My "market instinct" tells me to wait on the verdict of the market. I could take a speculative position in the DIAs, but rather than play craps with the market, I'm going to take a "time out" and watch the Industrial Average do its thing. Besides, I hate to fool with the market when bullish sentiment on the part of the crowd is at a boil.

As for gold, below, it continues to find support at its red 200-day moving average. Its first upside target is to get over 1700. Getting above the blue declining trendline would help. The full stochastics at the bottom of the chart look bullish.

gold 11 jan 2013

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