Why It’s Clear the Bulls Are Driving the Market

Investing in a Bull-Driven Stock MarketAt this time last month, the stock market was full of anxiety as we were heading for one of the worst Januarys in recent memory. The talk was about how the decline in January would trigger additional selling pressure in the stock market. The Stock Trader’s Almanac suggested there was a 47% chance the stock market would decline in 2014, but I was pretty confident on the other 53% that stocks would inevitably return positive gains this year, albeit at a slower rate.

As we enter into the final stretch of the first quarter, the month of February returned some strong gains in the stock market that I must admit caught me off guard.

Now I’m not suggesting the gains are not deserved, but I am somewhat perplexed with the rate of the rally despite what I feel is a lack of any fresh new catalyst to drive stocks higher.

The S&P 500 drove to a new record-high on February 25 and looks bullish, advancing more than 3.7% in February and into positive territory for the year. The chart of the index below displays a bullish “V” formation, which has been followed by a breakout to the record-high.


S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

The upside bullish sentiment is holding, as we continue to see the number of new highs easily outpace the number of new lows, which is positive confirmation in an up-trending stock market, based on my technical analysis.

Even the number of S&P 500 stocks trading above their respective 200-day moving averages has been on the rise and is currently above 81%, as reflected by the chart below. In my view, this is a bullish signal for higher gains to come.

S&P 500 Percent of Stocks Chart

Chart courtesy of www.StockCharts.com

With the stock market advance, all of the key market indices were positive in February and in 2014 so far, with the exception of the Dow, which is down 2.04% this year.

At this point, the winners so far this year continue to be the technology and small-cap stocks.

The NASDAQ is up 5.02% in February at a 14-year high and is slowly approaching its all-time high at over 5,100.

On the small-cap side, the Russell 2000 is up 4.78% in February and within 2.43% of its record-high in 2013. My sense is that the barometer of small companies will continue to advance higher as long as the economic renewal remains intact.

While I feel the stock market will deliver positive gains by year-end, I still also believe the road there will be full of bumps; it won’t be as smooth a ride as it was in 2013.

I suggest continuing to ride the bulls higher, but at the same time, take some profits off the table. There will be a buying opportunity on the horizon when stocks pull back. (See “When Weakness in Stocks Can Be a Good Thing.”)

Make sure you have some funds to buy on stock market weakness.