Most Bullish Thing the Market Can Do Is Go Up

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The title this week is an old Wall Street cliché. There has been a laundry list of reasons for the market to struggle this year. The headlines screaming the end of the Euro and the break-up of the EU seem a hundred years ago now. As soon as peripheral countries, Greece and Italy, for example moved back to the shadows the market has roared higher.

There haven’t been any concrete plans to backstop things in Europe but the language has changed and that is all the market needed to hear. While volume has been light the trend has been higher. If volume is light and the market is moving up then there just isn’t much selling going on is there?

The technical picture continues to gain momentum. There is just a slow steady movement of individual names moving into basing and advancing patterns. 65% of the stocks in the S&P 500 are in sound shape technically and 56% of small cap stocks are working right now. That is a significant improvement from where we were a few months ago.

The dollar was spiking for several weeks on the weakness in Europe. That trend has reversed in recent weeks. The dollar index is off sharply today and is at a six week low. This has had a favorable impact on commodities.

Investor sentiment remains at low levels. Sentiment levels are at extreme levels when you consider the advance of the market this year. The large drop in oil prices, until a few weeks ago, has been added fuel in the pockets of the U.S. consumer. Stock prices have moved in the opposite direction of oil prices for the past few years. Sharp spikes in the stock market coincide with a fall in oil. When we see oil trade significantly above $100 for a sustained period it acts like a pay cut for all of us and the market sells off.

The peak in oil was over four months ago. This is the time in the cycle when we should begin to see economic releases exceed expectations. Do not be surprised if the trend improves significantly on the economic front over the next month or so.

All of the talk of the fiscal cliff and elections is out there. These issues are certainly not going to sneak up on anyone. With the potential negative catalysts out there the market is working higher. News, both good and bad, is only discounted once. The market is acting now as if it believes that the issues hanging over the market right now will be favorably dealt with.

Resistance for the S&P 500/Dow/NASDAQ/Russell 2000 are as follows: 1424/13,340/3136/848. The 848 level on the Russell is a long way off. If the Russell trades above 822 that will be a sign that the market is picking up steam. Support levels are 1394/13,090/2998/791. If we close below those levels then a sell off will ensue. Based on the strength of the market pullbacks will likely be controlled and orderly.

Headlines coming from Europe or our Fed can have a major impact on the market. In the past few years efforts by central bankers have become more coordinated and centralized. Coordinated action, or the lack thereof, from the world’s central bankers can play a major role in near term market movements.

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About Thomas J Smith CFA