We started to see some improvement in several of our Psychology Composite indicators this week. One of those is the OEX Put/Call Ratio, which has been one of the best Psychology indicators over the last few years.
Our Monetary Composite improved from M3 to M2 last week, which was due to a very strong, highly liquid market. Valuation remains very undervalued.
So, today we have a healthy Psychology condition, along with very strong Monetary and Valuation components supporting the stock market.
The next round of easing is being sold as necessary for the economy, but it is really a camouflage to try to rescue any additional housing price decline. The latest Case-Shiller results and the fact that many mortgages are still 23% underwater, brought Bernanke out with the new QE2 idea. Typically, the residential housing market is the starter engine for a recovery, but so far, that has not been the case. Wednesday is the big day when they are supposed to start pulling the trigger.
In 1994, as the election was approaching and as Hillarycare had failed to pass, the massive mid-term election results, which added 50+ seats to the Republican side, first brought a little concern to the stock market. But then five weeks later, a rally started that didn't have one pause for the following seven months. We expect something similar is a possibility today.
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