The Advance/Decline (A/D) lines for major indexes suggest stocks can head significantly higher into year end. Be prepared to buy quality stocks on corrections to strong support.
Monday’s sharp decline took many stocks in the strong sectors back to first good support, while the market averages held well above their first retracement levels. With Monday’s drop, many called an end to the rally from the October lows and expected stocks to go much lower.
This view was supported by the weaker-than-expected earnings from Goldman Sachs (GS), but instead of dropping, the stock moved higher. Tuesday’s sharp gains are characteristic of a stock market that is internally strong and can go much higher.
The Advance/Decline (A/D) lines broke out of their trading ranges last week and are leading prices higher. This typically is seen in a market that surprises the majority by going higher than anyone expects. This is why I wrote last week to “Be Bold, Be Fearless…Buy the Dip.”
We could see action similar to the fall of 2010 when the NYSE A/D line broke its downtrend (line a) and started leading prices higher in early September. Stocks did pull back on September 7, as the A/D line formed a bullish zig-zag formation that is very similar to how the A/D lines look now.
It may take a move above 1250 on the S&P 500 and 12,000 on the Dow Industrials to really squeeze those on the short side and convince the skeptics to buy. The favored sectors for year end remain technology, consumer discretionary, health care, and utilities. There is also one sector that topped out in 2006 and may have finally bottomed out.
There are likely to be further one- to two-day drops as worrisome news from either the Eurozone or emerging markets will continue to scare the market. Despite the disappointing earnings from Apple, Inc. (AAPL) after the close on Tuesday, the futures are holding up well in early-Wednedsay trading.
NEXT: Latest Chart and A/D Line Analysis for Spyder Trust