Opinions, Sentiment, Numbers and Facts

Think back just a few months ago. It was real easy to be bearish on the market. Europe sneezed and we got the flu, or worse, on a daily basis. There were an awful lot of doomsday messages out there. Just a few weeks ago we were digesting the 2012 forecasts of the pundits, big and small. The takeaway was a subdued outlook from all the smart guys.

After this run in the market some of the headlines have quickly changed. There have been some bold predictions over the cover of magazines and newspapers over the past few days. There were some aggressive price targets set in major publications over the weekend.

What should we make of this? Remember the guy that shouts “Bull!” or “Bear!” is often someone having no idea what they're talking about—often pushing a book or newsletter. Many times the pundits that get the most coverage have not bought a stock for themselves or clients for years, if ever. So, I will attempt to be consistent and keep us following the drill. I follow the drill so I can get a concise view of the overall market. Also, I can extend the process to find individual names to go into portfolios. Let’s see how things shape up as we enter this week.

To get you up to speed, Leading Economic Indicators (LEIs) and the overall technical shape of the market will be analyzed week to week to see what the market is telling us. Based on changes in these factors I’ll become more or less bullish throughout the course of the year. The news from the LEIs continues to be favorable. Three key areas to focus on last week were employment, credit and sentiment. Labor data continues to improve. One thing you will see from my work is the focus on changes at the margin. I am more concerned about things getting better or worse. The absolute number is not of primary importance to me. Labor numbers continue to get better. Credit conditions continue to improve. Consumers and businesses are seeing increased access to credit. Consumer sentiment has improved considerably over the past several weeks. LEIs continue to improve and point to higher markets.

Now let’s look at the technical side of things. Remember 1-2-3-4. Stocks are basing, advancing, topping or declining. 80% of stocks in the S&P 500 are either basing or advancing. 82% of stocks in the broader markets are in those favorable categories. With these high readings I must be favorable on the market. But, please note that these readings are down slightly from last week. This is the first time in eight weeks that these levels have declined. We did have a negative divergence last week. The NASDAQ and Dow moved to 52 week highs last week but the S&P 500 and Russell Small Cap index did not. Negative divergences often lead to a pause and consolidation of recent gains. Here are the levels of support for the S&P 500/Dow/NASDAQ/Russell 2000, 1334/12,700/2880/809. Based on the recent strength of the market pullbacks will be mild and controlled.