The Trend Is Still Your Friend

04/16/2007 12:00 am EST


Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says technical and fundamental indicators suggest a new leg of the bull market is about to begin.

Many of the market averages have regained almost all of the ground lost since their February highs. The Dow Jones Industrial Average is 1.8% from its February high, the Standard & Poor’s 500 is less than 1% below its high, the Russell 2000 and the Nasdaq Composite index are less than 2% from their recent highs.

These numbers are important, because if these averages can decisively penetrate their February highs, we believe that a new longer-term [bullish] trend will be in place. What is impressive about this rally is that it is taking place despite surging oil prices, the sub-prime mortgage meltdown, a very weak housing market and a weak auto industry.

The Dow, S&P 500 and the all-important Dow Jones Utility Average are all above their 200-day moving average lines, as well as their 50-day moving average lines. The utility index has broken out into record territory, which is extremely bullish. The utility average normally tops out before there is a primary change in the markets’ overall direction, but this average is still in a very powerful up trend.

The ISE Sentiment Index, which is a measure of call buying versus put buying, [last week] registered 113 on a ten-day moving-average basis. [The previous month] the reading was 88. The 113 reading shows that participants are buying 113 calls for every 100 puts on a 10-day basis. The lower the number, the better the prospect of a rising market.

The ISE dropped to 58 on March 8th, which was the lowest reading since the ISE began publishing daily results back in October 2002. While the current reading of 113 is off its most recent lows, the number is still well below previous peak readings. At market tops the ISE number can register over 200. Many of the foreign markets have recovered from their sell offs and have established new up trends.

Operating earnings of companies whose stocks are included in the S&P 500 Index have risen at double-digit rates for 19 consecutive quarters – the longest streak since World War II. Yet, stocks remain cheap in comparison to bonds.

While gloom and doom prognosticators continue to focus on the slowing economy, the economy is still growing at a healthy rate and job growth is likely much higher than is indicated by government figures. Since September 2003, more than 7.5 million jobs have been created in the US, and the unemployment rate remains near a record low of only 4.5%.

The strong technical readings and fundamental statistics suggest to us that the bull market remains firmly intact and we therefore are continuing to recommend a 100% investment position in equities.

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