Dr Faessel ON THE MARKET 4-11-2011

A Dow Theory Buy Signal

Bullish Market Sentiment Continues Advance*

Goldman Sachs upgrades China

 

Last week the US stock markets went basically nowhere in very choppy below average and low-volume trade. The recent “overboughtness” burned off.

If there was a highlight it was that the Dow Transports peeled back down over 200 points after establishing new cycle highs a week ago Friday. The Transport closed at 5208 and are still a ways above price and 50 day moving average support 5140. Other highlights were new highs in crude oil, gold and silver; in addition the Euro hit 15 month highs as the US Dollar tumbled to 17 month lows.

AN IMPORTANT UPGRADE: Goldman Sachs GS OVERWEIGHTS China. China Stock markets have been under significant pressure of late and have turned down from their cycle highs were established in November 2010. While China's stock indexes moved up over the last couple weeks this upgrade by Goldman means a lot because in the minds of many there significant worries about China's real estate and their ability to keep economy growing at 8 or 9%.

Another big picture plus; the IMF now believes that the global economy will improve by 5.6% this year.

* Over the last two weeks the Dow Jones Industrials and the Dow Transports ticked new cycle highsconfirming a “Dow Theory Buy Signal”. The significance of the theory argues that if the nation's most powerful manufacturing and industrial companies as well as the companies that move those goods plus people are prospering as evidenced by those indexes that are moving in the same direction, especially hitting new cycle highs almost in tandem it's a big plus and the trend is likely to be continued.

Profit margins in the S&P 500 (SPX) are at 8.2% close to the 8.6% record and Street estimates are that they will grow at 15% this year. 2010 earnings in the (SPX) are projected to come in between $96-$98 and $105 to $112 for 2011. Both numbers are all-time highs. Set a 13.75 multiple on that number and you come up with the S&P 500 (SPX) at 1444 to 1533. So there's a lot of meat still left on this bone.

Bond investors are charging Greece 938 basis points more than Germany to borrow for 10 years. The spread for Ireland, the second country to obtain aid, is 577 basis points. Portugal, aiming for a relief plan by mid-May, pays an extra 518 basis points.

Short term price support in the in the S&P 500 (SPX) is at 1323.

The 50-day moving average support in the S&P 500 (SPX) is at 1313. 200-day moving average support is 1201.

Solid (4-days of rejection) price resistance in the in the S&P 500 (SPX) is at 1336 - 1338. The up topcycle high resistance established on 2/18/2011 just before the Mid-east turmoil & Crude oil supply worries developed remains at (SPX) 1344.

Tracking the Bond Markets $ 91Trillion –

The BARRON’s Confidence Index **came in at 81.4. Two months ago it posted new cycle highs of 83.7. The recent high numbers are at levels not seen since the fall of 2007.

Friday’s postings of key indicators and metrics:

Cycle highs or lows indicated in Red.

·                       Friday’s McClellan Oscillator is Neutral @minus 15

·                       Friday’s Gold (COMEX) $1473.4

·                       Crude oil (NYMEX) $112.79

·                       The Treasury 10-year 3.333

·                       3-month $ LIBOR at 0.283

·                       CBOE Put / Call Volume Ratio – 0.87

·                       Euro –1.4414

·                       VIX – 17.87

·                       US Dollar Index – 75.27

·                       Canadian Dollar – 1.04

·                       Copper – 4.49

 

* Key WEEKLY BULLISH SENTIMENT (i.e. CONTRARY INDICATOR) data points are broadly up again. While the bullish sentiment numbers are not at new recent highs to spread between the bulls and the bears as tracked by Investors Intelligence is the highest since 2007. This is a significant Market concern for sentiment watchers.

Consensus Bullish Investor Sentiment is moving up, but not quite to the levels that were recorded earlier this year. Considering that the major market indexes are just off - or at - cycle highs this overview suggests that slightly more "bullishness" can be established before the sell alarm begins to rings.

(High BULLISH readings in the Investor Sentiment Readings usually are signs of Market tops; low ones, market bottoms.)

 

·        Consensus IndexBULLISH investor sentiment was 71%. The recovery cycle high at 76% was established 5-weeks ago. The multi-year highs in Bullish sentiment of 76% were first reached in the first week of May 2007 just prior to the massive down-leg.

 

·        The Market Vane(Market Letter Survey) ticked up to 62% from 60% last week. It posted new cycle highs at 68% two months ago. Market Letter writers have backed off the levels of the Bullishness seen in late 2007 when the Market Vane registered above 70%.

·       The American Association of Individual Investors [AAII] Investor Sentiment Survey ofBULLISHNESS was up a several ticks to 43.6% from last week’s 41.8 % Three months ago it ticked new cycle highs of 63.3%. The low of the May selloff cycle at was at 30.1% [The lows registered on March 9^th 2009 were an historic low posting of 18.9% onlyBULLISH.]

·       The AAII InvestorSurvey of BEARISHfell again to 28.9%. It was 31.1% the prior week and well up from the 25.6% two months ago. 15 -weeks ago it posted cyclic Bearish lows at 16.4% that were lows not seen since 2005. The highest Bearishness occurred 6 months ago when it ticked the summer “market retreat” high at 57.1%. Item of note: In August 1987 it ticked the lowest low ever recorded at 6% BEARISH – Remember what happened on October 19, 1987...

·       The Citygroup “Panic / Euphoria” Model was up a couple of ticks to 0.24. The cycle high of a plus 0.32 was established in January. It moved from panic into neutral in October 2010. Friday’s posting is just below 2/3rds up in the high end of the “neutral” zone.

** The Confidence Indexis the premier measure of how the bond markets trillions (total global is around $91 trillion and USA is 39% of that) are allocated: (The bond market is twice the size of the stock market.) The ability of this key indicator of market health to post new highs bodes well for the economic recovery and for stocks to continue forward. One year ago it was 76.7