I hope these examples will illustrate the power of the A/D line to give you a different picture than is often portrayed in the financial media.
Even though the market is overbought in the short term, and we may see a sharp setback in the next week, it should be a buying opportunity. For the next few months, I expect the stock market to ignore the “wall of worry” over the debt ceiling and related economic headlines and continue to climb higher.
As was the case for much of the fourth quarter, the economic data over the past two weeks has generally been better than most economic forecasters expected. The housing data released Christmas week was quite good, with both new home and pending sales data continuing to improve.
Last week’s data from the Institute for Supply Management (ISM) on both the manufacturing and non-manufacturing front showed improvement. The ISM Manufacturing Index still shows a pattern of lower highs (line a), and needs to move above last April’s high to break out. The ISM Non-Manufacturing Index is on the verge of breaking its downtrend (line b).
This week the economic calendar is very light, with the jobless claims Thursday, followed Friday by the international trade numbers as well as import and export prices. From a global standpoint, we have both the Bank of England and ECB interest rate decisions on Thursday.
What to Watch
The sharply higher gap openings in some of the widely followed ETFs does favor a pullback this week, but I would not expect the gaps to be filled. Though some are worried about the quick move to overbought levels in some of the A/D indicators, it may also be a measure of the market’s strength.
The lows last Monday did hit some of my stops, which apparently were not wide enough for a moderately thin market, but many of my new buy recommendations were also hit. My new buy levels were at good support where the risk could be controlled, as I continue to think that entry levels will be key in 2013.
I would not expect most stocks or ETFs to break last week’s lows, and will be looking for partial setbacks to buy. The small caps did the best last week, as the iShares Russell 2000 Index (IWM) was up over 5.5%. The January Effect seems to be working again this year.
The individual investor turned a bit more bearish in the past week. The number of bulls dropped 6%. It is still well above the levels seen at either the 2010 or 2011 lows.
There has not been much change from the financial newsletter writers in the past month, as the number of bulls has ranged from a low of 43.6% bullish to 48.9% bullish. This is a sentiment gauge that has had little predictive value in the past year.
The reversal in the VIX was quite dramatic, dropping 37% in just three days. Those who used the VIX to hedge their portfolios because of the fiscal cliff were likely hurt.
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