For the week, the Dow was up +1.4%, scoring a fourth straight winning week. The S&P 500 gained +1.1%, but the Nasdaq Composite Index was down-1.1% for the week, along with the 2K, which was down 0.01%. Friday the trading volume total reported on the NYSE was higher, while volume was slightly lower on the Nasdaq. Advancing issues beat decliners by more than 6-1 on the NYSE and by 3-1 on the Nasdaq exchange. New 52-week highs expanded and in the process, outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange 97-24.
Breadth followers (McClennan, Hulbert), investment sites (Bespoke), and perma-bulls, were quick to jump on the breakout bandwagon and herald the “confirmation of a new uptrend”, even though key earnings reports and Wednesday’s EU summit meeting developments, still pose a potential threat to the viability of the very nascent breakout.
The past few trading days saw long term breadth indicators hold onto their bullish signals (chart 1), while their short-term components were negative, implying that the market had underlying strength, but was overbought. If an overbought market refuses to decline, it is usually a sign of strenth. This typically happens early in a new bullish phase, and it appears to be what's occurring at this time. However, the bulls haven't gained complete control, and there are still some divergences present that are a cause for concern.
Most notable, are the respective negative closes of the Comp and R2K this week. Both of these indices have shared the role of “leading index” in both directions, among the four major indices (SPX,COMP, DJIA, RUT). The fact that these two leading indices closed lower on the week, belies the supposition that this latest move is indeed the beginning of a stronger intermediate-term bullish phase in the broad market (chart 8). The most bearish indicator however, has been the $VIX (chart 9), which closed below 30.00 last week, only to rally as high as ~37.00 and close above 30.00 every day, this week, which may explain why the COT report shows smart money's short position increased as they sold into the rally (chart 3).
As always, there is a case to be made for the bullish camp. There is the very bullish October, and 4th quarter seasonality associated with equities, and as was alluded to earlier, there is the possibility that Operation Twist, may indeed have the same salubrious effect on the market, that QE1 and QE2 had on equities (chart 2).
That being said, I think the market rallies from this level, but exhausts itself before ever reaching the 1260.00 level. Then we’ll see if the bulls step back in, support the market, and run it up in time for Santa to bring his annual cheer to the markets.
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