I must admit that the current strength in the stock markets caught me a bit by surprise; but now the charts are looking much better and bullish.
The overall market is moving higher. About 84.13% of all U.S.-listed stocks are above their respective 20-day moving average (MA), versus 64.95% a week earlier and 20.09% a month ago.
The key stock indices have nearly recovered the decline from the multi-year highs. After a dreadful May, the second half is looking good so far.
A key chart development for driving the rally was the recent upward break by the key stock indices above their respective 50-day MAs. On the charts, we are seeing a bullish golden cross, with the 50-day MA trading above the 200-day MA.
At the mid-year, the key indices are edging higher and up between 6.52% for the S&P 500 and the market-leading 9.06% for the DOW as of the close of July 6.
Small-caps are strong with the Russell 2000 up 7.11% and only trailing the DOW. I favor small-cap stocks, which tend to outperform following a recession when the economy begins to grow. Case in point: after the recession ended in 2009, the small-cap Russell 200 advanced 25.28% in 2010, easily outpacing the 11.02% and 12.74% return of the DOW and S&P 500, respectively.
Investor sentiment has improved, with the NYSE and NASDAQ showing a bullish signal in eight of the last 11 sessions to July 6.
In my view, the bias has reversed to positive, but I continue to sense there is higher risk overseas in Europe and with the inflation issue in China.
The debt resolution inGreecewas the catalyst for the buying, but there continue to be issues, asPortugal’s debt was recently cut to junk by Moody’s Investor Services. And, despite the continued growth issues inEurope, the European Central Bank elected to raise its key lending rate by 25 basis points.
In China, the country is battling its highest inflation in about 34 months by increasing interest rates and tightening bank reserve ratios. It’s helping, but you have to be concerned about the impact on global growth if China stalls.
Domestically, don’t forget about the massive deficit and debt.
At this juncture, the charts are pointing to additional upward moves. Don’t fight the momentum. Ride it to potentially more gains; but, at the same time, you also need to be careful and use put options as a defensive hedge, as there remains some downside risk.