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Are We in a Buying Stampede?


With the fiscal cliff debacle now passing into the rearview mirror, at least in the short-term, investors are going to have to start focusing on the fundamentals.

For all the sad words of tongue and pen, the saddest are these: It might have been.
-- John Whittier; an influential American Quaker poet

Certainly, American poet John Greenleaf Whittier's apothegm has stood the test of time, serving as a universal lament for what "might have been." I was reminded of this maxim last week as Wall Street heard increasing laments from investors on the Street of Dreams. To wit, "What might have been if I had bought the indexes four weeks ago?" Or how about, "If I could have just covered my shorts... sold my bonds... bought Dell (NASDAQ:DELL), which is up 30% YTD," etc. And, those laments were music to my ears, for those are precisely the kind of "whines" that you hear at this stage of a buying stampede as the "outs" lament about not being "in." Indeed at session 18 (today), of the typical 17- to 25-session stampede, this is typically where the "outs" worry that this rally is the real thing – that the bottom has been made and a new bull move has begun. Reinforcing those feelings are numerous pundits pontificating everything from, "our government is dysfunctional and the debt ceiling will prove it," to the often recited "this is just a rally in an ongoing bear market." Of course, these are the same pundits that have already falsely called for the bear market to resume for nearly four years, as well as telling us that Armageddon was coming with the fiscal cliff. Moreover, when the cliff was pinned to the great wall of media hype the headlines were immediately refreshed for the next Armageddon, a.k.a. the debt ceiling. Of course, with that "orchestrated drama" now passing into the rearview mirror, at least in the short-term, investors are going to have to start focusing on the fundamentals, and here the story is improving noticeably. Nevertheless, these false prophecies should cause the "outs" to attempt get back "in," thus extending the "buying stampede."

Recall that "buying stampedes" tend to last 17- to 25-sessions with only one- to three-session pauses and/or pullbacks, before they exhaust themselves. It just seems to be the rhythm of the thing in that it takes that long to get everybody bullish enough to throw-in their "bear towels" and commit capital right in time to make a short-term trading top. While it is true a few stampedes have lasted 25 to 30 sessions, it is extremely rare to have one extend for more than 30 sessions. Today is session 18. Granted, for the past few weeks I too have been overly cautious, influenced by tried and true indicators that have served me well over the years. To be sure, the S&P 500 (INDEXSP:.INX) remains overbought with 92.6% of its stocks above their respective 50-day moving averages (DMAs), as well the NYSE McClellan Oscillator is still overbought in the short-term. However, the stock markets can remain overbought for longer than most think in a bull move. Further, the Volatility Index (^VIX) is not confirming the renewed stock strength and some of the hitherto leading stocks are not acting well.

On the bullish side, we began the year with back-to-back 90% Upside Volume Days, a feat that has not been seen since 1987 when the Dow Jones Industrial Average (INDEXDJX:.DJI) was beginning a rally that would carry it 24% higher into April. Interestingly, year-to-date this is the best beginning of the year rally since, you guessed it, 1987! Also recall that the history of back-to-back 90% days is for the SPX to be higher an average of 6.8% one month later 83% of the time and 12.8% higher three months later 100% of the time. Then there was the breadth thrust that occurred last Thursday when the net percentage of new 52-week highs in the S&P 500 hit 25% (see chart below). According to the sagacious Bespoke Group, "This is a very strong sign for the long-term health of the market, but it's also a sign that we remain overheated in the short term." The Dow Industrial, however, seems to paying no attention to the term "overheated" as it is now in position to challenge its all-time high of 14164.53 made on October 9, 2007. While I have conceded to a half-hearted Dow Theory "buy signal," when the Industrials broke above their recent reaction high of 13610.15 (made on October 5, 2012), therefore confirming the Dow Jones Transports (INDEXDJX:DJT) breakout to new all-time highs, it would be much better for the Industrials to achieve a similar new all-time high (above 14164.53). That would definitely be a Dow Theory "buy signal;" and, we are only 268.55 points away.

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