Talk about a wild ride! The 54 percent meltdown from the October 2007 highs put a serious dent in investors’ confidence. But, not to worry, the recent 40 percent rally went a far way toward restoring their dinged up disposition.
Now is the time to put faith in trusted indicators rather than in Wall Street’s optimism and news-based forecasts. News tends to be good at the top and bad at the bottom, and is thus unfit to be the foundation of anyone’s investment decisions.
What to expect? That’s the question for many. The old tug of war between the fear of losing money and the fear of losing out on profits is stronger than it’s been in quite a while.
Stock prices had reached levels investors would have been glad to sell just a few months ago. The Dow Jones got within 100 points of 9,000 while the Financial Select Sector SPDRs (XLF) more than doubled from their March lows to their June highs.
On June 15, the S&P 500 broke the upward sloping support line created by the multi-month rally for the first time since the rally started. Additionally, volume and breadth of the advance has been declining. The breach of the support line has now confirmed the lack of conviction visible over the past few weeks and point towards a correction deeper than what we’ve seen since the rally started to take off.
Investor sentiment numbers further confirm that this entire push from the March lows is nearing a point of exhaustion. In a March 2 Trend Change Alert, the ETF Profit Strategy Newsletter advised investors to sell the short ETFs acquired early in January and buy long and leveraged long ETFs, and provided the following clue regarding a rally top: “A multi-month rally, the biggest rally since the October 2007 all-time highs, should lift the indexes by some 30-40 percent. The down trend will resume once the rally exhausts itself. This point of exhaustion is likely to happen at a point where optimism takes over and investors think that the Q1 2009 lows are here to stay.”
The Investor Intelligence Survey of Investment Advisors shows that bullish advisors outnumbered bearish advisors by 22.8 percent the week of June 9, the highest reading in a while. Advisors are not alone though. Publicly traded companies and investors have jumped on the rally bandwagon as well. TrimTabs Investment Research reported that firms have issued $64 billion worth of new shares. This is nearly twice the previous record of $38 billion.
Bull markets climb a wall of worry. Investor optimism has been growing steadily, which is an indication that this rally is nothing more than a counter-trend push. How high will it go and where is the ultimate market bottom?
Only a composite of reliable short and long-term indicators can answer this question. The March and June issues of the ETF Profit Strategy Newsletter include an analysis of the four most reliable indicators along with target levels for the top of this rally and the ultimate market bottom.