The Party's Just Getting Started

03/18/2013 9:00 am EST


Dan Sullivan

Editor, The Chartist

All the naysayers in the markets right now are really a great sign that things are only getting better, contends Dan Sullivan of The Chartist.

With much fanfare accompanied by a great deal of skepticism, the Dow managed to break through its all-time high set back in October of 2007. The Russell 2000, Dow Transports, and S&P MidCaps have also recorded historic highs in recent sessions.

To say that the public has not embraced this rally is an understatement. In a Yahoo poll taken on March 5, investors were asked, "Are you getting back in the game?"

  • 17% said, "Yes, I'm putting more money into my 401k."
  • 22% said, "Yes, I'm picking up stocks and bonds."
  • 19% said, "Yes, I'm investing in mutual funds and ETFs."
  • But 42% said that they were still waiting to get back in.

This skepticism is also readily apparent in the financial press headlines: "With Dow at Record Highs, When Will Gravity Take Hold?" and "Don't Fight the Tape, But It's Not Going to End Well".

The American Association of Individual Investors' poll prior to the breakout had only 28.4% in the bullish camp-the lowest level since August of last year. Investors Intelligence-the folks who track advisors' sentiment-had the bullish contingent at 44.2%, versus 54.7% as recently as February 7.

Judging by all of the naysaying, one would think that we were in the throes of a bear market. At a time with the Dow and other indices at or near record-high territory, this is a big plus for the stock market.

The time to worry is when just about everyone is on board. The stock market operates on greed and fear, and it's quite obvious that we still have a ways to go before the greed stage is reached.

There is no question that the trend is favorable, with all of the averages above their uptrending 200- and 50-day moving averages. And the Fed could not be in a more accommodating mood.

Stocks are certainly not on the bargain counter. However, compared to bonds or 91-day Treasury bills, they are the cheapest in more than 30 years.

The rotation out of bonds and into stocks is just beginning. For 20 months in a row through the end of 2012, investors pulled money out of domestic equity funds. January 2013 was the first sign that the tide was turning, with inflows reaching $18.5 billion.

We keep hearing that the market is way overbought. We disagree. Our overbought/Oversold model reached heavily overbought status at +3.53 on January 2 and reached +3.68 on January 4. Since that date, the overbought condition has been worked off, with a current reading at a neutral +1.57.

The Advance/Decline line (A/D)- a very important gauge of the market's overall condition-is not only at its highest level of the bull market, but at its highest level in history. In most instances, it will top out well ahead of the key averages. Currently, it is displaying typical bull market action.

At the conclusion of the last bull market, which ended on October 9, 2007, the A/D line had already reached its peak of the cycle in early June. At the end of the boom back in 2000, the A/D line had already peaked out two years prior. The fact that the A/D line is in a pronounced uptrend could not be more bullish for the stock market's prospects.

This party, in our opinion, is going to last a lot longer than most stock market participants anticipate.

We recently recommended the following ETFs for traders: Financial Select Sector (XLF), Vanguard Small Cap (VB), and Vanguard Value (VTV).

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