Market Rally Stays Positive - - Clear Skies on the Horizon!
Market Direction: Buy Is The Way Forward!
by Ian Harvey
April 02, 2013
With the Dow and the S&P 500 at all-time highs, U.S. stocks may seem ripe for a pullback, as Europe's debt problems have returned to the limelight. But experts aren't anticipating a spring slide in the stock market for a fourth year in a row.
There are many positives this year that may help offset some of the negatives making for a potential change in an upward direction, particularly economically based:-
• Job growth finally appears to be reaccelerating with three of the past four months posting more than 200,000 in net job creation.
• The housing rebound is now well-entrenched, supporting economic activity and household confidence.
• Business spending growth appears to be reaccelerating and likely to support manufacturing activity, which had fallen in May through July of the past few years and contributed to the market decline.
Other Factors that Support a Market Rally
Even though some investors are suspicious of the rally’s staying power because of dwindling trading volumes, there are analysts who see positives in those numbers.
As a whole, the average daily volume for March is about 12% lower than a year ago with NYSE composite volume of 3.44 billion shares and Nasdaq composite volume of 1.7 billion shares, according to Barclays. And the current March average continued to grow thinner as the month progressed.
But low overall volumes have become a less reliable metric as market skepticism rose following the financial crisis therefore; comparing buying volume to selling volume is a more reliable metric.
While overall levels have been low, buying volume has been outpacing selling volume since mid-December, except for a brief period in late February. In fact, longer term indicators of buying and selling volume show a breakout above levels seen in March 2011, suggesting that stocks are on an upward trajectory and that investors should buy any pullbacks.
Also, valuations are lower now than they were at previous bull market highs because company earnings are stronger. Plus, interest rates are far lower than they were in 2000 and 2007. The 10-year Treasury yield is around 2%, compared to around 4.5% in 2007 and 6% in 2000.
Another positive metric is market breadth, as seen by the steady rise in the NYSE advance-decline line, or the number of advancing stocks minus the number of declining stocks which indicates the current rally has legs to continue. Of all the bull rallies that have occurred since 1968, all ended following “a bearish divergence in breadth,” triggering a decline of 20% or more in the S&P 500.
That isn’t the case now! One example of the NYSE advance-decline line not confirming a rally was as recent as September, when the S&P 500 pulled back by more than 7% over the next two months. The A-D line didn’t confirm the September rally because it was driven by mega caps.
History Supports the Market Rally
Another consideration is that since 1950, April has been the best month of the year, posting an average monthly increase of 1.97 percent.
In the last 20 years April's been up an average of 2.7 percent, but the “Sell in May and Go Away” dictum, may cause some adverse effect to this point of history.
It's never a bad idea to take profits. But it might be a bad idea to blindly "sell in April and go away" with the markets rumbling forward with a full head of steam into second quarter.
Sectors Affected by an Extended Rally
.....Read ”Sectors Affected by an Extended Rally” for more details.
Many analysts have recently increased their levels for the S&P 500, such as new resistance levels of 1,600 to 1,700 after the S&P 500 breaks through the current resistance level of 1,550 to 1,576.
Also, the U.S. remains the best place to invest, just as it did in the first quarter of 2013.
Therefore, in all probabilities, the stock market rally will continue to pick up steam – if this is the case then buying would be a sound strategy!