What's Missing from This Bull Market

03/31/2011 10:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

To seal the recent bullish turnaround, the number of stocks hitting new highs needs to expand, writes Dan Sullivan of The Chartist.

Stocks and investors have proven to be surprisingly resilient, despite a litany of alarming events that have triggered global uncertainty.

Over the past several months, we have witnessed global unrest on a major scale: Conflict in the Middle East, first in Egypt and then Libya; surging oil prices; the Japanese earthquake and tsunami and subsequent nuclear crisis; renewed European debt worries; and very disappointing home sales in the US have dampened, but not broken,
investor optimism.

The return of skepticism, though, might be a good thing, as sentiment measures have dipped to more reasonable levels. The latest from Investors Intelligence now has 51.6% of advisors in the bullish camp, down from a high of 58.8% last December.

Meanwhile, the American Association of Individual Investors in their weekly poll shows bulls down to 41.8%, versus over 63% in December. [Both of those numbers did rise noticeably from last week—Editor.]

The recent setback saw the Dow lose 777 points, down 6.28%, in 17 trading sessions. At the most recent lows on March 16, my overbought/oversold indicator was intensely oversold, registering a -3.37.

I use the Value Line Geometric, an index devised to track the median daily value change for its 1,600-plus components. Whenever the VLG falls 3% or more under its 19-day exponential moving average, the market, by our interpretation, is intensely oversold.

Since then, the Dow has rebounded 737 points, or 6.3%, in the process moving back above its 50-day moving average. Most of the key indices have joined the Dow above their respective 50-day lines. Among them are Russell 2000, Dow Transports, S&P 500, S&P Small Cap Index, Wilshire 5000, S&P Mid-Cap Index, and most recently the Nasdaq-100.

SullivanChart1

As you can see by the charts, the Advance/Decline Line tracking the number of daily gainers vs. losers has been consistently above its 50-day moving average since early July of last year—except for a one-day dip on March 16, which was the day that the Dow lost 242 points, marking the lows of the recent sell-off. Both the A/D Line and Dow appear poised for a breakout.

The market might not be out of the woods, but it certainly has taken a big step in the right direction. The CBOE Market Volatility Index (VIX) is once again under its 50-day moving average, which had contained it since last October except for four trading sessions during the most recent sell-off.

As the market continues to rally, I would like to see an expansion in the number of 52-week highs. The inability of the new high list to expand in recent weeks has been one of the telltale signs of the market’s subsurface weakness.

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