There Are Many Reasons for a Bullish 2012!
There are several signs pointing to new highs for the S&P 500 (SPX), but it obviously makes sense to buy on the dips and not at the highs.
Right now we are "short-term overbought".
However there are several longer-term indicators that say new highs are very likely, which presents us with a bullish 2012, such as:-
• The Presence of "the Golden Cross".
• Momentum indicators having shown strength.
• Internal indicators have shown enormous strength.
• This is an election year.
• We have just had a very strong January.
1. "The Golden Cross"
The “Golden Cross” (the opposite of "the death cross") is when the 50-day moving average crosses above the 200-day moving average.
Many traders look at this as a long-term buy signal. Of course there are a few missteps here and there, but such is the case with any indicator. In fact, "the death cross", which is when the 50-day MA crosses below the 200-day, recently occurred (in August) very close to the 2011 low -- the exact opposite of what traders would have expected.
If you look at the chart below, you can see highlighted, in yellow, when this "false signal" occurred.
S&P 500 1 Year Chart
Also highlighted, in green, is when the golden cross occurred. This has occurred three times in the past three years.
It is important to not focus on just one indicator -- it's a recipe for disappointment. And there's no reason to do that when you have several other indicators you can use to confirm what the other is saying.
2. Momentum Indicators Have Shown Strength for a Bullish 2012
In the same chart above, you should also notice the green and red highlighted parts of the “Relative Strength Index” (RSI).
Momentum indicators, like many indicators, are more reliable for entry signals (as opposed to exit signals). What this means is that the "buy signals" are more reliable in an uptrend and the "sell signals" are more reliable in a down trend.
Sell signals are LESS reliable when found in an uptrend.
Many people forget this and put too much faith in the RSI sell signals. In fact, the RSI sell signals in an uptrend can be very reliable, as long as you know that they aren't all created equal.
Depending on the situation, one RSI sell signal, during an uptrend, may be more meaningful than another.
Before looking at the S&P 500 chart below, focus again on the longer-term S&P 500 chart above.
Sure, we have just seen an RSI sell signal, which is a good start for a bullish 2012. We know it's an RSI sell signal within an "uptrend" for a number of reasons.
Take a look at the way the S&P 500 bottoms out (whether it be a bear market bottom or a sharp long-term correction) and the RSI moves from below the 30-line back above the 30-line (an RSI buy signal). This event is highlighted in green on the chart above.
Now notice how the first sell signal (highlighted in red) after that buy signal (that we saw at a significant low in the S&P 500), did not signal weakness at all.
The following is the case with many momentum oscillators (like the ROC): When the market bottoms out, causing a "buy signal", and then quickly jumps much higher, causing that first overbought sell signal, it should be viewed as a sign of strength -- again a sign for a bullish 2012!
'ROC - Price Rate of Change'
This is a technical indicator that measures the percentage change between the most recent price and the price "n" periods in the past. It is calculated by using the following formula:
(Closing Price Today - Closing Price "n" Periods Ago) / Closing Price "n" Periods Ago
ROC is classed as a price momentum indicator or a velocity indicator because it measures the rate of change or the strength of momentum of change.
Not that a sell signal is a sign of strength, but the fact that the indicator went from oversold to overbought right after a significant bottom shows strength in the market -- again, a bullish 2012 sign!
If you study a bit, you'll see the opposite is also true after a mature bull market initially tops out -- where the initial jolt lower is so strong that it causes the indicator to go from overbought to oversold pretty quickly (when the RSI goes from above 70 to below 30). That would be a sign of more weakness to come.
S&P 500 6-Month Chart
In the chart above, you can see a shorter-term view, where we have an RSI sell signal and a MACD sell signal. But as explained, this can probably be viewed similarly to the initial sell signal in a new bull market. That first sell signal can be practically ignored -- because, while every sell signal in an uptrend is different depending on circumstances, they should all be respected to some degree.
The fact that many indicators are pointing to a short-term overbought market implies that we should see at least a little bit of weakness, giving us a buying opportunity, which will eventually lead us to a bullish 2012.
If this is confusing you, look at the 3-year chart of the S&P 500 again and look at what the market did after the RSI gave that first overbought sell signal off of a significant low. You can see it barely moved lower.
3. Internal Indicators Have Enormous Strength -- A Great Sign for a Bullish 2012!
The indicators are in this order for a reason -- similarly to the momentum indicators being able to go from oversold to overbought, the ability of the NYSE BPI (an internal indicator) being able to do the same is a sign of strength -- a bullish 2012!
NYSE Bullish Percent Index
By looking back to October, 2011, 18.85% of all common stocks listed on the NYSE were showing buy signals. That means over 81.15% were on sell signals. But since then the NYSE BPI has climbed to 67.58 (as of yesterday). That means 48.73% of all common stocks on the NYSE managed to break through key resistance levels, overcoming the sellers that were selling stock at those key prices, presenting a nice situation for a bullish 2012!
The fact that the chart moved from such a low point to such a high point in such a short period of time shows that the buyers are buying up as much stock as they can get their hands on -- another sign of strength -- the signals are apparent for the bullish 2012!
4. An Election Year
The strongest year in the 4-year election cycle is typically the pre-election year. But even with so much turmoil, and a congress that makes us feel like we are trying to catch a speeding bullet, last year was basically flat.
The election year is typically the second strongest year in the 4-year election cycle. This is not a speculation that the typical pre-election year strength will somehow spill over into the election year. But what we know is that the administration trying to stay in office will say and do everything possible to do so, including waiting until the election year to "massage" the economy, and help investors benefit from a bullish 2012.
That means stimulus that might have otherwise occurred last year may have been saved for this year. It means troops come home. It means many forces try to get people to feel warm and fuzzy, and nothing makes people feel warm and fuzzy like a bull market.
5. A Very Strong January
January has been quite strong if we observe the indicators of the“January Effect” and the “January Barometer” -- the start of a bullish 2012!
The “January Barometer” was created by Yale Hirsch, who said "as the S&P goes in January, so goes the year".
This January flagship indicator is explained quite adequately by the Stock Traders Almanac:
"It came into effect in 1934 after the 20th Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20. The long-term record has been stupendous, an 88.7% accuracy rate, with only seven major errors in 62 years. However, in the 62 years since 1950 only two of those errors occurred when the S&P 500 was positive in January for an incredible 95% accuracy rate!
"They also have "the first five days" of January as an indication of the rest of the year. The first 5 days of this year, the S&P 500 posted a 1.8% gain…..."
"……..The last 39 up First Five Days were followed by full-year gains 33 times for an 84.6% accuracy ratio and a 13.6% average gain in all 39 years. In presidential election years this indicator has a solid record. In the last 15 presidential election years, 13 full years followed the direction of the First Five Days. Two of five down First Five Days in 1956 and 1988 were not followed by full-year declines."
As a matter of fact, in the first 16 days of the year, the S&P 500 was up. And the down days posted minimal declines. The index ended at 4.4% for the month -- a good start for a bullish 2012.
There are definitely many headwinds to be faced that can fight off the strength on the buy side. But the buy side seems like it's ready to put up a strong fight and follow through to present us with a bullish 2012.
Short-term, the stock market seems overbought -- be a buyer on a pullback.
Be careful not to confuse the time frames that are discussed in this article (short-term, intermediate-term and long-term), and be careful not to confuse the warnings about the economic headwinds with current price action.
Today it is all about price, supply and demand. There is no denying the strength we've seen, and strength is usually followed by more strength, which is why we have the makings of a bullish 2012.
Remember that markets can stay irrational longer than you can stay solvent, so no matter what the economic reality is or what your beliefs are, you never want to "fight the trend" and trade based on what "should be happening".
It makes sense to trade based on what is currently happening, and keep the headwinds in the back of your mind. You can play them when they come to fruition.
Until then, use prudent risk management and position sizing, and always limit your downside -- but profit from a bullish 2012 wherever possible.