It's Hard to Buy Good Stocks Now

The rally since November 4th has lost some of its overall vigor.  As the election results came in during early November, just like in 1994, we had a mini celebration as most indices and a wide plurality of stocks made new highs.  At that juncture, we saw 90% of the S&P 500 stocks trading above their 50-day moving average.  That had been, and still appears to be, a resistance point.  Some of those winners started to digest their gains after that and have not joined the celebration of the last week.

Our Psychology Composite moved to P4—just slightly in the yellow zone—on November 15th.  That is not earth-shaking, but in general, our best buying zones come when this composite is in the P1 to P3 range.  So, we’d love to see Psychology back to at least P3 with some of our key indicators like the AAII Bears-to-Bulls Ratio, the Rydex Ratio or the Gambill Ratio back down into the green zone.

The stock market has now been advancing since March 2009, and we believe it has only been the manifestations of the first phase of the bull market.  In the first phase, the market moves up largely with investors in the dumps—not feeling good about anything.  We’ve just seen the unemployment rate at 9.8%, and the Double Dippers love it.  But the stage is set, in our opinion, for the mood to change in the next few months. 

Don Hays

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