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Higher Highs and Higher Lows

S&P 500 Annotated

I thought I’d show you an update of the graph of the S&P 500 I’m watching for clues as to how the market recovery is developing. If you didn’t read the original blog post with this graph describing the various indicators, you can find it here:

Click here for the original post

As you can see, I’ve added two additional green horizontal lines showing that we are developing a clearly defined pattern of higher highs and higher lows. This is a very healthy pattern for a recovering stock market and one that I am happy to see – granted the down days like yesterday are no fun, but if they are part of the recovery pattern, then they are a necessary evil.

The reason we like to look for patterns is that they tend to identify broader trends. In the case of a market making a pattern of higher highs and higher lows, you can see an uptrend develop. It is in reality just a depiction of investor psychology – one of the two elements of a stock market (earnings and sentiment) – in the case of this pattern, you can see that a more positive sentiment is developing and that buyers are beginning to outweigh sellers.

I see no reason to change my view that we will continue to rally into year-end, with the green box on the chart representing our target for the market at which point we will begin to raise cash in client accounts. However, many things can change between now and then, so if something happens to cause us to adjust our strategy or view on the market we will advise you here on the blog.

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