The market continues to march higher in 2013 as the short-term to long-term trends and momentum for the S&P 500 remain bullish. The market is currently rallying on broad-based participation and thus is not showing any of the major warning signs of a significant top which is typically characterized by selectivity.
The Dow Jones, as well as a number of other equity indices, has recently achieved new all-time price highs. Was it really a question this would occur? We do need to remember we’re now just edging above price levels seen almost six years ago in 2007 and thirteen years ago in early 2000, and on an inflation adjusted basis we’re still close to 20% below old highs.
There is an endless parade of “experts” that will go on TV or send you a free copy of their newsletter telling you emphatically what is going to happen in the market. They will also tell you why what is happening shouldn’t be happening and give you an often complex reason for why things are happening.
The dollar has rallied through the month of February as a result of a number of bullish catalysts. Technical support, Italian elections, FOMC minutes, and ECB meeting expectation were all reasons to be bullish on the dollar. I believe these items are behind the dollar and it’s time for a correction. It could also be inferred that a rally is due in commodities. The only thing holding back a dollar correction is a strong employment number tomorrow. That question will be resolved soon.
Technically speaking, the biggest concern right now is the recent decline in breadth. Near the end of January better than 85% of stocks in the S&P 500 were above their respective 50 day moving averages. Now just over 65% of S&P members are above their 50-day moving average.
Too often investors play the ball and not the whistle. They have an idea of what SHOULD happen but fail to see what IS happening and do not listen to the ultimate referee for investing—the market. If you believe we are heading into a bear market and/or recession and yet the market continues to hit new 52-week highs and the ISM Manufacturing Index remains north of 50 in expansionary territory, how long will you wait before the whistle blows?
I wanted to discuss some technical relationships I’m starting to see in the market that might shed some light on recent events. The goal is to help us identify corrections and rotations in the market between various assets classes and stock sectors.