The Stock Market Signals A Medium-Term Rally

In last week’s Money and Markets column, I talked about probabilities. And I explained why I expect the current stock market rally to have legs. This market call, however, is valid for just a few quarters …

My long-term outlook hasn’t changed one iota!

Fundamentals are bad and getting worse. The huge economic imbalances created during the bubble years haven’t suddenly disappeared. They’ll rear their ugly heads again in the not too distant future, probably as early as next year.

But for now, it doesn’t make sense to fight the trend.

We’re witnessing a huge liquidity-driven rally, and I’m not willing to slug it out. That’s why my medium-term outlook has become bullish. The way I see it, it’s much wiser to adapt and go with the trend - realizing that it’s just a passing episode, a huge bear market rally if you will.

I know very well that the lousy fundamentals conflict with this bullish call.

Still, the huge wave of liquidity, of worldwide money printing and stimulus programs can dominate the fundamentals for a lot longer than seems possible. So I cannot let fundamentals underscore this bullish forecast … quite to the contrary.

It doesn’t pay to fight the trend.

But the market can ignore fundamentals for a long time. And it doesn’t pay to fight the trend. Clearly …

The Market’s Message Is Medium-Term Bullish!

Right now there are no signs of tiredness. The market has delivered a clear medium-term, bullish message. Just some of the positive developments I’m seeing:

• The market is breaking out of a nice inverse head and shoulders bottom formation …
• Its 200-day moving average is rising, confirming the new uptrend …
• Momentum indicators are reaching extremely overbought levels, which is actually typical at the beginning of an uptrend …
• Strong advance-decline statistics, proving the breadth of the current advance …
• And both the Dow Industrial Average and the Dow Transportation Average are rising to new highs for the year.

The market’s message is clearly bullish for the medium-term. And I expect this rally to continue.

Bottom line: The stock market’s technical picture has become clearly bullish. And if history is our guide, we have to expect a continuation of this rally that started in March.

Yet …

This Stock Market Break-Out Has Been Greeted With Much Skepticism

Interestingly, the bullish market message is greeted by a high degree of skepticism. For example, on Saturday the headline of a major German newspaper, Die Welt (The World), read: “Stock market strategists are remaining doubtful.”

The U.S. sentiment indicators paint the same picture …

The Investors Intelligence poll shows only 40 percent bulls. Readings above 55 percent are considered a warning sign that a trend is weakening. So we’re far from this threshold.

And as you can see in the bottom section of the chart below, the Wall Street Sentiment Survey registered a huge jump in the number of bears last week, up from 41 percent to 61 percent.

Source: www.decisionpoint.com

These two indicators tell me that Wall Street does not yet trust this rally.

Bull markets are said to climb a wall of worry. In other words, stock prices rise despite bad news. And that’s exactly what we’re witnessing here: Strong buy signals being greeted by huge bearishness - typical for the start of a bullish trend.

Remember that intervening rallies during secular bear markets are not uncommon. In fact, it happened during Japan’s lost decade as well as during the Great Depression.

But for the medium term, I suggest considering short-term weakness as a buying opportunity.

Subscribe by RSS Subscribe by Email