— by George Leong, B. Comm.
It is great to be a bull at this time, as the market is trading with an upside bias. As of August 13, the overall U.S. market is edging higher after the recent pause. About 89% of all U.S. stocks are above the 200-day moving average, up from 88% a week earlier and higher than the 80% a month ago. The same goes for the shorter-term moving averages.
The market is burning on all cylinders, yet there is some buying euphoria that’s giving the current rally some risk. The Federal Reserve left its near-zero interest rate policy intact after its two-day FOMC meeting last week. As you know, this is important for the continued recovery in the U.S. economy and its impact on global economies. The economy needs reduced interest rates to continue to strengthen and pull out of the recession. The Fed realizes this and will not increase rates that could harm the positive signs we have been seeing. As long as inflation is benign, interest rates will continue to be attractive and drive consumer and corporate spending. However, rates for mortgages are edging higher, which could impact the recovering fragile housing market.
Overseas in China, there is more optimism on news that the country’s exports, retail sales and factory output rose in July. China remains a key factor for the global economic recovery. The county is a mass consumer of goods and services.
The near-term technical picture continues to support the rally. Investor sentiment continues to be bullish. Investor sentiment on the NYSE has been bullish in 84 of the last 87 sessions (97% during this time) back to April 9. The readings have been extremely bullish at over 90% since July 14, when the DOW was trading at 8,359 and NASDAQ at 1,799. The charts show the bullish trend. In the technology area, the NASDAQ has shown bullish investor sentiment in 65 of the last 87 sessions, or 75%. The strong bullish readings will continue to support the market. Watch as stocks move higher, as the market will become overbought.
Let’s take a brief look at each of the major indices I watch.
For the NASDAQ, the near-term technical picture is moderately
bullish, with above-average Relative Strength, which could signal some uncertainty.
Market breadth as indicated by the advance-decline line (A/D) is neutral, with six of the last 10 sessions below 1.0. The near-term trend is neutral.
The NASDAQ is hovering around 2,000 and is above its 20-day moving average (MA) of 1,964, along with its 50-day MA of 1,874. The index is above its 200-day MA of 1,639. The recent top was broken on the chart. The near-term targets are 2,046 and 2,187.
The CBOE NASDAQ Volatility Index (VXN) is a barometer of near-term market volatility based on NASDAQ 100 index option
prices. A high VXN indicates maximum fear and a low VXN indicates reduced apprehension.
The VXN has been on a decline. The current trend is down and
indicates less volatility.
On the blue-chip side, for the DOW, the near-term technical picture is moderately bullish, with above-average Relative Strength. The recent top was broken on the chart.
The DOW is holding above 9,000 and looks good above its 20-day and 200-day MAs. The near-term targets are 9,476 and 9,877. The index is marginally overbought.
The broadly based S&P 500 is moderately bullish, with above-
average Relative Strength. The recent top was broken on the chart.
The S&P 500 is hovering around 1,000 and above its 20-day and 50-day MAs. The near-term target is 1,018 and 1,077.
The CBOE S&P 500 Volatility Index (VIX) has been on a decline. The current trend is down and indicates less volatility.
The Russell 2000 is moderately bullish, with above-average Relative Strength. The index just broke above resistance. The index is above 500 and its 20-day moving average of 551. The near-term target is 603. The index is slightly overbought.
The bottom line at this time is to ride the rally, but watch your stops and don’t be hesitant in taking some profits on your big winners.