More Hopeful, but Still Not Bullish

09/23/2010 11:31 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says stocks have moved above their June and August highs, but he’s still not convinced they can break significantly higher.

With our models improving but still in a negative mode, our advice for long-term investors is to remain on the sidelines 100% in money market funds.

Since June there have been two failing rallies: The first one took place [from] June 6-18, encompassing nine trading sessions, with the Standard & Poor’s 500 gaining 6.38%. From that point, the market sold off sharply.

The S&P 500 gained 10.29% on the next failing rally, which started on July 2nd and ended on August 9th (25 trading sessions). Once again, stocks sold off sharply.

The most recent rally, which started on August 26th, has lasted 18 trading sessions thus far with the S&P 500 gaining [9% at its peak Monday]. Just about all of the key indices we track are now above their respective 200-day moving averages; however, the key indices briefly moved above their 200-day lines in mid-June and early August only to succumb to selling pressure.

The obvious question is: “Are we in for a rerun, with the market breaking suddenly to the down side?” That’s one reason why investors are nervous. If the key indices manage to take out their June/August highs with authority, it could well set the stage for a serious run at the April highs. (Editor’s Note: The S&P has closed decisively above the August closing highs of 1127.79 for three days in a row.)

[Last week’s survey]  from Investors Intelligence now shows 36.7% of advisors in the bullish camp versus 31.1% bears and 32.2% looking for a correction. This would suggest that with 63.3% either bearish or looking for a correction, more upside is in the cards; however, 51% of investors in American Association of Individual Investors’ (AAII) [September 15th] weekly poll were bullish, versus 24% bears.

The last time AAII bulls approached 50% was on January 8th, with 49.2% bullish versus 23% bears. Over the next 20 trading sessions, the S&P 500 lost 7.7%, while the Russell 2000 was clipped for a 9% loss.

Despite the rally, there is no question that the public is becoming increasingly disillusioned with the stock market. For the week ending September 8th, investors pulled $2.2 billion out of domestic mutual funds after pulling $7.7 billion out the week before. Over the past 19 weeks, investors have taken a good $65 billion out of the coffers of mutual funds.

It is hard to envision a lengthy bull market taking place with all of this fire power being taken away from mutual funds, [but] a disillusioned public with net redemptions running month after month is exactly what occurred after the devastating 1973-1974 bear market. Over the next three years—1975, 1976, and 1977, the S&P 500 posted a 56% gain.

Subscribe to The Chartist here…

Related Articles on MARKETS