It’s Still a Bull Market

01/02/2008 12:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of the Chartist, says the market is holding up well despite all the negative news, and he thinks stocks could head higher.

There is no question that the majority of investors are becoming increasingly nervous. You can’t blame them, given the preponderance of adverse news highlighted in the financial press day after day.

[But] this market has a lot going for it. Corporate insiders certainly think so, as they have been buying on balance over the last three months. Public shorts have pulled back somewhat since the end of November. However, specialists’ shorts, as of December 10th, were at only 6.79% of public short-selling. This is the third lowest percentage in over five years.

Also, the short-interest ratio on the New York Stock Exchange, which is bumping up against 8%, is close to a multi-year high. The bottom line is that the public, judging by their shorting activity, is apprehensive while the specialists’ data is highly bullish. The ten-day moving average of the International Security Exchange Sentiment Ratio is still bullish with a current reading at 118. This means that option participants are buying 118 calls for every 100 puts. (On the average, they buy in excess of 150 calls for every 100 puts.)

The price action of the market has been very choppy over the last several months, with three pullbacks since February. However, on each succeeding pullback, the benchmark Standard & Poor’s 500 has held above its previous low and it has managed to rally impressively off its up-trending 200-day moving average on the last two selloffs. It barely touched its 200-day line in August on an intraday basis, and dropped below it for only two trading sessions in November.

The Dow Jones Industrial Average [and the NASDAQ Composite index have] traced out similar patterns but never did penetrate [their] up-trending 200-day moving average.

Bull markets are global affairs and a very high percentage of countries’ stock markets around the world continue to exhibit bullish chart patterns. Granted, some markets have pulled back, but just about all of them are holding above their previous low point and remain within striking distance of their bull market highs. Two exceptions would be Japan, which topped out last February, and Belgium.

Despite all of the adversities this market has had to deal with—the subprime fiasco, runaway energy prices, a credit crunch, the real estate downturn, recessionary fears, and the erosion of the dollar—most of the widely followed stock market averages posted gains for the year.

One of the most bullish things the market can do is to hold its own or advance in the face of adverse news. With our models in a positive mode, our advice is to stay the course. Long-term investors and traders should continue to maintain current positions. Despite what you might be hearing to the contrary, it’s still a bull market.

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