August 19th, 2006

New bull market around the corner?

I’ve had writer’s block and there’s been nothing exciting about the market to write about …. until now. This past week has been the best since before May with all the major indexes moving up significantly. According to “The Big Picture” column today’s in IBD’s:

“The NASDAQ vaulted 5.2% for the week. That marked the tech-rich index’s best showing since a 5.7% bulge in late May 2003, a few weeks after the market followed through on a new rally that spring. From March 2003 to late January 2004, the NASDAQ motored 72%.”

So what about my bearish call of last May and my confirmation of the call July 19? Well, I’m taking it off the table. I’ve been covering my shorts (an learning experience which has produced big frustrations and little profits) and buying stocks in select industries with the cash we put aside in May. For example, we’ve recently added:

  • retailers (KR, SFY, SPTN, CVS, AEOS, MW, SPLS, OMX, DLTR). (see my
    post of May 8)
  • electric and gas utilities (OKE, NU, FPL, NFG and DPL),
  • financials and brokers (BSC, MS, RGA, ET, NITE, RKH)
  • tech and internet (IACI, DRIV, FORM, TFSM, TXN, SIRF, CYMI, DIOD)
  • health (ENDP, PFE, AZN, BLUD, BRKR)

Yes, I enumerated many reasons for embracing the notion of “sell in May and go away” (see my post of May 15) but the index I’ve created to measure the “temparature” of the market … a momentum-adjusted S&P index …. never quite supported the notion of major correction. As a matter of fact, the indicator turned siginificantly bullish during the first two weeks of July when the market retreated to the neckline of an evolving head and shoulder top formation … but
with little confirming volume. My “momentum-adjusted S&P index” started to point up and continues to move forward. And since July 19, it has lunged ahead:

In fact, this indicator looks more positive today than at any time since the bubble peak at the end of 1999:

While on May 7 I lamented about the lack of fanfare that accompanied the Dow touching new all-time highs, the major correction that followed since then explains why. But I think the next time will be different. The advance/decline line has started to improve and up/down volume appears to support the view that an influx of cash is chasing a smaller supply of stocks. I think the market is now positioning itself for a major move to the upside that could begin in the fourth quarter. You heard it here, you’re hearing it for the first time, a new bull market is around the corner.

Subscribe below or click here to learn more about help for navigating turbulent markets.