Bullish Bias Towards Stock Remains, But Be Careful

The bias towards stocks remains bullish, as the market continues on a two-year rally from the March 2009 low. All signs point to additional gains ahead. The buying has been broadly based from micro-cap stocks to blue-chips. Investing in gold has returned enormous profits. Yet, we have really yet to have encountered a correction of any significant degree, albeit we had several down days of over one percent in the recent weeks.The bias towards stocks remains bullish, as the market continues on a two-year rally from the March 2009 low. The trend of the NYSE new-high/new-low ratio has been edging higher, with 161 of the last 167 sessions flashing a bullish sign. In the technology area, 119 of the last 125 sessions have been bullish. All signs point to additional gains ahead.

The buying has been broadly based from micro-cap stocks to blue-chips. Investing in gold has returned enormous profits.

Yet, at the back of my mind, I feel a bit nervous that we have really yet to have encountered a correction of any significant degree, albeit we had several down days of over one percent in the recent weeks. This is not to say that stocks are overvalued; I feel they are fairly valued based on the current economic and earnings metrics. Unless there are fresh data that support additional gains, stocks could trade sideways in a tight channel in the upcoming months.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

At this point, about 81.33% of all U.S. stocks are above the 200-day moving average (MA), down slightly from 82.38% a month ago. For the shorter-term moving averages, the monthly decline has been more significant. For instance, about 59.87% of U.S. stocks are above their 50-day MA, down from 69.76% a month ago. We could be seeing a market decline.

The market will continue to need leadership to have any chance of advancing higher. The banking sector is looking more positive and could drive the buying, as there is some confidence surfacing towards America’s financial structure.

I feel that technology will also provide leadership.

But be careful, as there remains market risk; namely the situation in the Middle East.

George Soros, who made a billion dollars betting on the collapse in the U.K. pound, came out and said that a decline in government fiscal spending could dampen the economic growth.

It is great to be long in this market, but do not get too aggressive. I believe that a prudent approach would be to ride the rally and continue to look for investing and trading opportunities. Take some profits on some of your bigger winners.

The key is to enter into smaller positions, so, if the market slides, the loss would not be as critical to your trading base.

If the tide turns, make sure you are not tied emotionally to the stock. Sell it.

Remember: Bulls make money, Bears make money and Pigs get slaughtered.