Market Brief: Monday, July 19, 2010

Our Psychology Composite moved to our top rating (P1) right at the bottom of the weakness two weeks ago. After a strong one-week and the volatile last week, we’ve now moved back to a more normal P2 reading. That is not negative at all, since P1’s require all systems to be in gear at the same time, and that doesn’t happen too often. We’re guessing that we have a few more weeks of basing out here. So while many others are trying to paint a gloomy stock market topping formation, I am painting it as simply a consolidation that I believe will start to lift off in the next few weeks.

Several of our indicators are showing that this stock market is not at a big risk. At the end of the day, valuation is the most important parameter guaranteeing the risk/reward. With the increased earnings, the lower stock market prices, the reduced inflation outlook, lower bond yields, our valuation composite is now showing the S&P 500 to be 34% under-valued.

Economically, the Fed is bluffing the banks. Their bond purchases are paying them less (the yield curve is flattening and bond rates remain low) as their reserves are moving up. So the banks are seeing flat revenue growth and will finally have to get out and line up somebody to lend money to if they want to grow. This should be in time for the Christmas shopping season.

Technically, the S&P Mid-Cap Index, whose long-term pattern is tracing out a reverse head-and-shoulders pattern, shows promise.  If the pattern is fully executed with an upside break-out above the 840-850 zone in the next 18 months (now it is at 726), it will indicate a major new bull market for the public investor that would end the catharsis that started as long ago as 1996.

I have big hopes that we are shaping up for the answer we all want: higher stock prices and less volatility. It still looks very promising.

To read more, click here. 

Don Hays