One of the rationales I’ve heard for bullishness on the financial markets since I was an investment babe-in-the-wood is the “mountain of money” argument. Cash on the sidelines, etc. I’ve heard this at major market peaks and major market troughs.
Two indicators are currently suggesting caution towards the market’s short-term outlook. Caution is certainly reasonable given how overbought the markets are, though an overbought market can stay overbought and continue on longer than expected. That said, certain canaries in the coal mine are beginning to sing that a short-term pullback may be just around the corner.
European stocks have taken a breather this week on the back of political unrest in Spain and Italy over the weekend. The market has had a nice month clear of tail risks. With the extended move in equity markets worldwide, investors are looking for excuses to take profits.
The markets continue to display impressive strength though we did see a slight deterioration over last week with the market’s short-term outlook. Most of the deterioration in breadth has occurred in cyclical sectors which is likely due to some profit taking in that area.
Some technical measures in the market were somewhat surprising last week. After a huge spike higher you would expect all measures to show signs of being severely overbought. This is not the case. Typically we would see the call/put ratio spike to at least the 1.70/1.80 range at this stage of an advance.
With the small cap and midcap indexes reaching all-time highs and the Dow Jones Industrial average less than 200 points away from an all-time high, the case for a new secular bull market in stocks being underway is hard to dismiss. As suggested in articles I penned in 2011, there are likely two large forces at work that will propel stocks higher in the coming decade, one of which is favorable demographics out to 2028, and the other is the slow glacial movement of institutions rotating out of bonds and into stocks.
Last week, I quickly discussed the performance in sector funds over the past month. We have new emerging leadership in energy this month while financials take a breather. I wanted to take the time to focus not only on short-term changes, but also show current trends that are still in effect.
The market continues to march higher in 2013 as short- to long-term trends and momentum for the S&P 500 remain bullish. The slight deterioration in the daily readings for MACD BUY signals as well deterioration in short-term trend strength in cyclicals suggests the market may cool off a bit ahead to help alleviate the market’s overbought condition.