November 2004 = March 2003 ?
Since the rally began late October, it has been quantitatively different than the prior failed moves of 2004.
In many ways, this parallels the move that began in March 2003: Each was preceded by a series of false breakouts; Both made higher highs and higher lows (a notable improvement). In both cases, the 50 and 200 day moving averages were penetrated to the upside. And in both instances, the advance-decline line moved up smartly. That powerful “breadth thrust” created momentum that persisted much longer than most expected. Lastly, each established a significant trend line that proved difficult to crack.
That leads us to the move at hand. Presently, we are not particularly overbought, based upon the McClellan oscillators. That suggests mild consolidation - backing and filling, with shallow pull-backs - before the next leg up.
The only real red flag is Sentiment. It’s registering a bit too “giddy.” Investors describe themselves as Bullish only after they deploy capital, not before. Too many Bulls suggests a fully-invested Street. We’re not quite there yet, but if you want an indicator to fret about, this would be the one.
Indeed, if worrying makes you happy, then you need only peruse the news: Oil is stabilizing in the low $40s; Unless China’s economy stalls, Crude’s next move is more likely to be upwards than down. Iraq, temporarily off the front pages, remains problematic. The dollar's freefall shows few signs of ending anytime soon. Interest rates continue to rise, flattening the yield curve . Housing, the economy’s biggest driver, is now in its 8th inning. There’s been little in the way of Job creation, and those jobs created pay less and offer worse benefits than those lost.
Regardless, the headlines are not what have been driving this market higher - it’s the technical set up, the healthy internals, and the cash on the sidelines. As we noted back in October, Wall Street was positioning for a year-end rally, and that rally is now in full throat. A rather complex mix of internals (trend, sentiment, monetary and valuation) are driving are the cyclical movers of equities.
That’s reason enough to (mostly) ignore the headlines, and focus your efforts on the underlying condition of the markets. These cyclical factors establish the path of least resistance, after a minor pause, as higher.
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