Markets Feeling a Bit Better…But Stay Cautious

by George Leong, B. Comm.

Markets are rallying, with the technology sector continuing to generate strong gains and leading the broader markets higher, especially with continued concern regarding the financial sector. Technological advances will continue to surface despite the global slowing. Investors will pay higher multiples for these companies. So, while financials, retail and cyclical stocks are stale, investors are moving to tech. Moreover, continued optimism towards the restructuring of the U.S. financial system is helping to drive the buying.

Last Thursday was a key day for stocks, especially the technology sector, as the NASDAQ advanced close to four percent and turned positive for 2009. The chart of the NASDAQ is showing a bullish V pattern, but it needs to make a strong break at 1,650 to move to 1,800. Failure could see a relapse and a return to the sideways channel. As I have said, this had been a tech-led rally and I expect this to continue. Your safest bet may be mid-to-large-cap technology stocks, but also take a look at the smaller companies that have good technologies. When you buy good technologies, you are buying growth.

Technically, the current rally in stocks is confirmed by the technical metrics. The near-term picture is bullish with rising relative strength, but be aware of the overbought condition that has surfaced.

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The DOW broke above 7,900 on Thursday and appears set to take a shot at 8,000, not encountered since February 13 when the DOW traded at an intraday high of 8,005. The upward move in the DOW is quite impressive given that it was only a few weeks ago that the blue-chip index was at 6,440.08, its lowest level since 1995. The 20% plus rally indicates a market reversal in the trend. Yet there is uncertainty. Is this a valid reversal or a bear market rally? As we said yesterday, there are bullish V formations on the major indices, with another potential breakout in the works.

The broadly based S&P 500 is showing a bullish V formation, but needs a break at 900-950 to move higher.

The small-cap Russell 2000 is also showing a bullish V formation, but needs a break at 475 to move higher.

It is clear that the market is feeling better now than a month ago. On the NYSE yesterday, we saw the first bullish reading in
investor sentiment since January 5. But with only six bullish readings since May 22, 2008, there is a long way to go. The near-term trend on the chart is neutral.

Technically, investor sentiment remains extremely bearish, but it has been improving over the last few days. At this point, about 15.51% of all U.S. stocks are above the 200-day moving average, up from 12.46% a week earlier and from 8.80% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving averages trending higher.

The key will be how stocks behave over the next few weeks. The current feeling is that markets are heading higher, although you should be careful, as this could still be bear market rally. Ease into positions and do not overbuy.