All Systems Are Still "Go"

10/26/2009 11:41 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says key technical indicators show the rally will continue as investors’ pessimism creates “a wall of worry” for the market to climb.

With the US pumping trillions of dollars into the banking system over the past several months, driving interest rates to historically low yields, money has been fleeing the US dollar into assets such as gold, oil, stocks, and commodities.

Since the market bottom on March 9th, the US dollar has plummeted over 15% and with this drop, the market has been moving steadily higher. The market sectors that benefit the most from a lower US dollar are energy, gold, and silver, and basic and industrial materials.

The market seems to have found a sweet spot. To begin with, there is still a great deal of cash on the sidelines, [because] many investors feel that this rally has come too far too fast and is living on borrowed time. This is exactly the type of pessimism you want to see in the early stages of a bull market.

The rally is being fueled by historically low interest rates, with the Federal Reserve in a very accommodating mood. Technically all systems remain on “go,” with all of the major indices exhibiting bullish chart patterns. The market subsurface is in very good shape, as evidenced by the performance of the advance/decline line. The number of 52-week highs has recently hit their highest level since June 2007.

Over the years, we have found that the ideal environment is one in which the benchmark Standard & Poor’s 500 records a limited number of trading sessions in which it gains 2% or more. Since our July 21st buy signal, encompassing 59 trading sessions, the benchmark S&P 500 has had only one 2%-plus up side day, which occurred on July 23rd.

The last bear market, which saw the S&P 500 drop an incredible 57% between October 9, 2007 and March 9, 2009, [had] no less than 39 days in which the price change of the S&P 500 exceeded 2%.

What about the prior bull market? Officially the bull market began on October 10, 2002, however, it has always been our contention that it really began on March 12, 2003. Between March 12, 2003 and October 9, 2007, the S&P 500 posted an impressive 94% gain, and yet on only 13 occasions did it manage to gain 2% or more in a single session.

Between April 4, 1994 and May 23, 1996, the S&P 500 posted a gain of 54%, and yet a 2%-plus up day occurred only once—on April 5, 1994. There were no 2% up days in 1995 or 1996. The next 2%-plus up side day did not occur until October 28, 1997.

We do not think this market has gotten ahead of itself, as many are suggesting. We base this on the lack of 2%-plus up side days since our July 21st buy signal. Our models are in a bullish mode; thus, we continue to advise a 100% invested position.

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