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Notice the following on the three month daily chart:
-- Prices have broken through the downward sloping trend line that started in early October.
-- Prices are above all the SMAs
BUT:
-- The SMAS are bunched together, indicating a lack of overall direction, and
-- The break-through happened on low volume (which is to be expected in end-of-the-year trading.
Click for a larger image
-- On the P&F chart, note the market formed a triple top at the end of the year and has now broken out of that top.
Also consider the following points from this week's Barron's:
Stocks kicked off 2009 with a sprightly rally, but the longevity of that start will ultimately depend on stocks' ability to attract that record dry powder.
And it's quite a cache of capital. The amount of money stashed in money-market mutual funds had surpassed that in stock mutual funds as of the end of November, according to the Investment Company Institute, a national association of investment companies. In contrast, money-market funds were just 48% of stock funds when 2008 began. "If all the money currently sitting in U.S. money-market funds left and went into buying shares of the Standard & Poor's 500 index, it would absorb 42%" of that benchmark's market value -- the highest in at least 25 years, says Jason Goepfert of sentimentrader.com.
That's not all. Stocks' 38.5% pummeling in 2008, their third worst year ever and the biggest annual loss since the Great Depression, had sent investors scurrying. Today, Americans are setting aside just 42% of their investment money for stocks, says the American Association of Individual Investors. At the same time, 42% of their portfolio is in cash, the highest ever. "Never before have these investors allocated as much or more to cash as they have to stocks," Goepfert says.
Individuals aren't alone, and even professional money managers are hiding in short-term Treasuries that yield next to nothing. A time will come when earning zero interest starts to get old.
And consider the following points from an interview with Laszlo Birinyi:
An indicator that we developed is the number of stocks that are down 50% from their highs. At the market bottom recently, 322 of the S&P 500 stocks were down 50% from a year ago; that's an extremely oversold condition. The previous record, which was set in July of 2002, was 130 stocks. To us, that's a very useful measure of whether the market is oversold or overbought.
.....
You published a note last month titled "S&P 750: The Bottom." What led to that conclusion?
A few things caught our eye. One was that we started to have some very bad days in November but the market still recovered. On Dec. 5, the unemployment news was really terrible and yet the market recovered that day, with the S&P closing up 3.7%. To us, those are signs of a positive market where people are starting to look beyond the bad news.
It seems traders are looking at current economic news as occurring at or near the absolute bottom in the economic cycle. Assuming that to be the case, people are trying to get in early on a perceived rally that will occur in the first half of the year.
What else caught your eye in calling a market bottom?
We did an analysis that came out of our cycle study, and it showed that the greatest amount of decline in a bear market is always at the very end of the bear market. As we saw it, if indeed the market did bottom in November, as we suggested, a total of 70% of the decline occurred in the last quartile of the bear market. We also noticed that financial stocks were starting to show some stability, as well as large-cap stocks.
Consider the from September to mid-October the market (the SPYs) fell from 120 to 84, or a drop of 30%. That's a big drop and could easily fall into the point made above.
Bottom line: there are a lot of bullish elements lining up for the year. Whether they play out is a different story.
