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Market Trend Update


The market has been on a major run higher in recent sessions and consequently is overextended on a short-term basis.

The short-term indicators I follow on the chart above (the RSI and Stochastics) show that we are very overbought an due for a pullback.

The McClellan Oscillator has dipped below zero and the 10-day moving average of the Advance Decline Line has dipped below the 30-day moving average. This tells me that we should expect to see a pullback next week – absent any major positive news to encite investor enthusiasm.

Also, the VIX volatility indicator below 20 shows us that investors are way too complacent with the current market action. This is a contrary indicator, so complacency is a bad thing.

On an intermediate-term basis, the Summation Index is still showing a market that has strong positive momentum and the MACD is still showing a positive intermediate term view of the market. Cash Flow is still strong, but both the Accumulation/Distribution Index and the On Balance Volume Indicator are starting to weaken.

All-in-all, I’d anticipate that we’ll see the market pull back to the 13-day or even the 34-day moving average depending upon whether there is any negative news that hits next week. I’d look for a move down toward 1150 or 1125 (lots of folks I talk to in the industry have stops at 1150, so if we drop below there look for selling to accelerate). That being said, the monetary stimulus fundamentals are still strong and could push us a bit higher before a pullback.

However, the intermediate term technicals show that a move to the 13-day or 34-day moving average would be an entry point for any cash on the sidelines.

A year ago, the market recovery was young and everyone feared it. The VIX was over 40 and no one believed that we’d ever have a recovery. Today, a bit over a year into the recovery, I hear investment managers shouting the all clear signal on local radio talk shows, I see the VIX below 20, and it makes me take a second look.

I still believe we are in a secular bear market but the current move is a cyclical bull counter-trend rally. Those counter-trend rallies can be very big moves and last longer than anyone believes possible. They also sucker people in that sold at the bottom and held out too long before getting back in.

There is too much monetary stimulus for any down move to be significant, but if you are one of those that want back in having sold near the bottom, I think you should wait for the market to come back to the moving averages before you commit your capital.

You will also want to stay on top of your investment as this will not be a straight move up to the 2007 highs so you will need to protect your profits.

Also, the past year was a beta driven move where the rising tide lifted all boats. Going forward you will need to be in the right investments that have catalysts for growth.

In my upcoming newsletter that will be mailed in a couple of weeks, I will be telling you more about the investment themes we are using to guide our activities and tell you more about the bull/bear market cycles.

Never a dull moment…

I’ve mentioned before that The Killers are one of my favorite new bands. Your trivia question for today is to tell me the connection between the name of the album that the song in the video appeared on and the band’s home town.

Enjoy the beginning or Spring!