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What Are the Current Odds for the Stock Market?


Many investors believe that this rally is artificially induced and will lead to a market crash. Not to be overlooked, however: Earnings for the S&P 500 have doubled over the past four years.


When the equity markets are in a "bull move," one thing investors watch is the Advance/Decline numbers to see if the rally has good participation, or if it is being driven by merely a few key stocks like it was in late 1999 and early 2000. As can be seen in the chart below, after being range-bound for much of 2012, the S&P 500 Cumulative A/D Line has broken out on the upside and is at a new rally high.

Also confirming that the markets have more room on the upside is the Selling Pressure Index that resides at new multi-month lows. However, the Buying Power Index is lagging, suggesting last week's rally was more about a lack of sellers rather than earnest buying. Speaking to sectors, health care (+3.29%), consumer services (+3.14%), consumer goods (+2.72%), and telecommunications (+2.29%) were the best performers and 8 of the 10 macro sectors are trading in overbought territory. Along that same line, the SPX is still pretty stretched on a short-term basis, trading roughly 10% above its 200-day moving average. Meanwhile, the market's daily internal energy level was somewhat depleted by last week's rally, and the weekly internal energy indicator is only halfway charged up. Putting it all together suggests that while the equity markets may pause/pullback, there is nothing in the "tea leaves" suggesting a repeat of the double-digit declines that began in the spring of the last three years.

While the equity markets have treated us pretty well this year, the commodity markets have not, punctuated by Friday's massive breakdown in gold. Many attribute gold's "gotcha" to the Goldman Sachs' "sell gold short" missive, but I think Shahab Jalinoos has a better guess:

Draghi made clear today that he wrote a letter to Cyprus president Anastasiades making "very, very clear" that EU treaties establish that the decision on how to use the proceeds of any Cyprus CB (Central Bank) gold sales must be made by the CB itself, not the government. He added, "What's important, however, is that what is being transferred to the government budget out of the profits made out of the sales of gold should cover first and foremost any potential loss that the central bank might have from its ELA." Net result: People are viewing this as establishing a precedent that ELA losses can/should be covered by gold sales, which is important given that other risky countries like Portugal have large gold reserves. The ELA is the Emergency Lending Assistance: It's when national central banks in Europe lend money to banks against collateral too weak for the ECB itself to accept, but with permission from the ECB the credit risk taken by the national CB and by extension the national government.

A number of weeks ago, I thought gold was into a bottoming formation and recommended purchase. Obviously that was a mistake. While the bullish fundamentals remain in place for gold, the price action is terrible and I would cut those losing gold positions in half. Why only half? Because the last time the Gold Miners Bullish Percent Index hit zero was in late 2008, right before the gold miners embarked on a decent rally.

The call for this week: The "buying stampede" is at a legendary 70 sessions and quite frankly I have never seen anything like this in 42 years in this business and more than 50 years of watching the markets. As they say, "Markets can do anything," and this one certainly is! Indeed, it has now been more than 100 sessions without so much as a pullback of 5% or more, the third longest stint since 2002. This morning, however, China's growth risks are in focus as Q1 economic data falls short, which left the preopening SPX futures down about 8 points. So maybe we will finally see a pullback, but it should not be all that much.
No positions in stocks mentioned.
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