Bulls Need to Keep the Story Going

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Last week I noted that better than 70% of all stocks on offer were either basing or advancing. That did not change during last week’s market action. Since you have a better than 7 in 10 chance of picking a winning stock the bulls have the upper hand.

Near term resistance for the major averages is 1476/13,500/3130/884. I provide the numbers, you figure out the averages I am referring to. Support levels for the major indexes are 1450/13,290/3075/780. During the moves in the market last week the technical picture of the market actually improved slightly.

So, with the bulls in charge they have to now explain why the markets can continue higher. After a good run it is time to consider what can derail things. The long term technical picture is sound, very sound. Pullbacks at this stage should be orderly and controlled. Here are some of things that I am thinking about.

Complacency can very quickly creep in and derail the markets. A few short weeks ago everyone was certain that the fiscal cliff was going to be the ruin of us all. The consensus is generally wrong, and it was again this time. Things have changed considerably over the past few weeks. Recently two contrary indicators have flashed ominous negative signals. The AAII and investment advisor surveys have become bullish. Again, always remember these are contrary indicators. These surveys tend to get it wrong far more often than they get it right. A pick up in these readings much higher than today’s levels will increase the chances of a correction being worse than controlled and orderly.

Housing stocks have climbed a wall of worry for almost a year now. A few months back a clear minority of economists thought that housing related numbers would be positive. Actual monthly numbers related to housing were coming in above all estimates not just consensus numbers. Now nearly all economists think that housing related data scheduled to be released later this week will be better than expected. The fact that economists are almost always late to the party makes this enthusiasm from them troubling. 

Too much of a good thing is a bad thing. We have had early runs higher in the market each of the past three years. Those moves higher have been met by sharp declines. There are a variety of theories as to why the market has sold off after the strong starts. Higher inflation, in the form of higher energy prices has been the primary reason for the selloffs in my opinion. Better than expected growth numbers from China for the past several weeks have led to a spike in iron and copper prices. If we all get a tax hike from higher energy prices it could cause growth numbers to falter and lead to a pullback in the coming months.

That is how I see things now and what I will be keeping an eye on as we go forward.

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About Thomas J Smith CFA