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Are We in a New Secular Bull Market?


A break by the Dow Jones Transports to new all-time highs would suggest we are.

Turning to the stock market, I am currently short-term conflicted. While the long-term case remains strongly bullish based on a more collegial Congress, a continuation of the housing boom, strengthening auto sales, improving employment, low inflation, liquidity, etc., the short-term is becoming suspect. First, there is a tendency for the equity markets to record a temporary peak in early January. Second, bond yields spiked higher last week as did the S&P 500 (INDEXSP:.INX) futures. Historically, when interest rates and stock prices make new 50-day highs simultaneously the result has been at best a pause and at worse a 4%+ decline. Third, the McClellan Oscillator remains overbought in the short-term (see chart below).

Fourth, a basket of the highest shorted stocks dramatically outperformed the SPX last week, implying a massive short squeeze with many of the shorts being "run in" (read: less demand to buy). Fifth, the surge reflected by the back-to-back 90% Upside Days has temporarily exhausted Demand. Sixth, our Eurodollar Commitment of Traders chart, which has done a really good job of forecasting the stock market's short-term direction, is calling for a slight pullback here (see chart below).

Accordingly, if I could script it, I would look for an attempt to challenge the September 2012 intraday reaction high of 1475 this week. That attempt should fail, just like the multiple attempts to surmount the 1420-1430 resistance zone on the way up that we suggested would take multiple tries to surmount; and, it did. If correct, the failure at 1475 should cause a pullback into early February, which should be bought. As for which sectors to buy, I like all of the sectors except for consumer staples because they look expensive to me as too many portfolio managers have tried to "hide out" in them, worried about the presidential election, the "cliff," Euroquake, the debt ceiling, etc.

The call for this week: We now have two conflicting mantras. First, "If the bulls fail to call, the bears may roam on Broad and Wall" (we got no Santa rally last year). Second, "So goes the first week of the new year, so goes the month, and so goes the year" (the SPX was up 4.57% last week). Of course I really like the "December Low Indicator" that I related to the folks at the Stock Trader's Almanac years ago, and still graces that publication. To wit, "Pay attention to the December low. If that low is violated during the first quarter of the New Year, watch out." For the record, last December's closing "low" was 12938.11. Then there are the plethora of questions I have received about Dow Theory given the recent strength of the Transports. While the Dow Jones Transports (INDEXDJX:DJT) have tagged a new reaction high, so far it has not been confirmed by a like move from the Dow Jones Industrials (INDEXDJX:.DJI) to a new reaction high (read: upside non-confirmation). This could also prove to be a short-term negative when combined with all the other short-term negatives mentioned in this report. That said, if the Industrials confirm the Trannies by breaking above their October 5, 2012 reaction high of 13610.15 that would be a Dow Theory "buy signal." However, if you want to think about a new secular bull market (as stated, I think there is a 25% possibility we are already in one), a break by the Trannies to new all-time highs above their July 7, 2011 high of 5618.25, confirmed by a new all-time closing high in the Dow above its October 9, 2007 high of 14164.53, would imply we are indeed in a new secular bull market.
No positions in stocks mentioned.
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