The Rally Has Momentum

04/16/2009 10:52 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says the current stock market rally looks strong, and he cites some favorable indicators that suggest it could go on for a while.

The rally off of the March 9th lows is showing renewed vigor. Stocks surged sharply higher after Wells Fargo (NYSE: WFC) reported results that far exceeded Wall Street estimates. Financials also received a boost from a New York Times article that said 19 major banks will pass "stress tests" being conducted by the government to determine their viability in the most adverse conditions.

The stage was set for a rally of above-average proportions. At the time of the lows, stocks had fallen to extremely oversold levels as the major averages traded at 12-year lows. The American Association of Individual Investors poll reached a record, with 70% of its members in the bearish camp on March 5th. The Chartist's overbought/oversold indicator declined to a low of -14.3% on the same day.

The obvious question on everybody's mind is: Is this a rerun of last November or the start of something more substantial? The November rally saw the market giving back all of its gains and then some. When the dust settled on March 9th, the S&P 500 was a good 10% under its prior bear market lows' set back on October 20th.

We think this rally has more upside in it. In the November rally, upside volume exceeded downside volume by nine to one or more on four occasions. Upside volume was much more explosive on the current rally. On days when the upside volume was above nine to one, the average works out to 21 to one. On the prior rally, it was 11 to one.

Another reason this rally has further to go is the fact that the ten-day moving average of advancing stocks versus the ten-day moving average of declining stocks recently exceeded two to one. Whenever this has occurred in the past, the rallies still had further to run, and we don't think there is going to be an exception this time around.

The ten-day advance/decline ratio registered a reading of 2.21 on March 23rd. The last time the ten-day A/D ratio exceeded two to one was all the way back in 1991. Near term, we anticipate the market moving higher. But looking further out, a subsequent test of the March lows is a distinct possibility.

The bear market is now in its 18th month. Many bear markets have lasted considerably longer. The previous bear market, which began in March 2000 and ended in October 2002, lasted over 30 months; however, the current bear market has been one of the most vicious on record.

At the March 9th lows, the S&P 500 had lost 56.7%. Only one bear market over the last
100 years has exceeded that level, and, of course, that was the bear market that took place during the Great Depression, where losses exceeded 89% over 34 months. Nothing has come close in the interim. Thus far, there have been four failing rallies of 12%, 7%, 18%, and 24%, in which the prior lows were taken out.

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