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Despite Conspiracy Theories, Market Internals Remain Strong

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Expect only corrections in the context of the normal ebb and flow of a cyclical bull market that continues on.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Love never dies a natural death. It dies because we don't know how to replenish its source. It dies of blindness and errors and betrayals. It dies of illness and wounds; it dies of weariness, of withering, of tarnishing.
-- Anais Nin

There are many conspiracy theories going around about the strength of the market, but as I have been sharing on the Buzz & Banter for the past few months, the market internals remain strong and, in my opinion, there have been no significant red alerts. Advance Decline Lines remains in sync with the market, as do most other market indexes.

A market decline is not led by reluctant sellers but important catalysts. There are two on my radar; one is the S&P being very close to the technical resistance zone shared on Dec 7, 2010. (Please see today's Buzz for more detail. Subscription required.) This is important development in the context of a "mean streak in the Dow." Please see an excerpt from Bespoke on this:

The Dow hasn't had a 1% down day since before Thanksgiving, and Monday's 0.32% pullback is the biggest decline the index has had since the start of December. It is nearly unprecedented to go this long without having a one-day decline of at least one-third of one percent. Over the last 50 years, we found just three other 30-trading day periods where the index had a maximum decline of just 0.33%. Back in April and May of 1965, the Dow went 30+ trading days without declining more than 0.15%. Later on that same year, the Dow had another 30-day period where its biggest down day was just 0.32%. And in 1963, the Dow's maximum one-day decline was just 0.33% over a 30-day period.


(Market action following these stats: In 1963 the market had a minor correction, and in 1965 and 1966 the market underwent a sharp, short corrective phase. I also believe that out of these three time periods, 1965-'66 offer a better comparison to current times than 1963, since 1963 was the first year out of a bear market.)

The second worry on my radar is the recent resurgence of agitation in the municipal bond zone. While this also means money fleeing these troubled bonds in favor of equities, it can also mean potential trouble in terms of a dislocation.

Municipal Bonds Chart

To reiterate, I am only turning defensive in the very short term due to these concerns, and not looking for a major market top at this juncture. Until there are signs of "betrayal and weariness," I am expecting only corrections in the context of the cyclical bull market that continues on -- the usual, regular ebb and flow of a cyclical bull market.


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No positions in stocks mentioned.

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