The Internal Stock Market

Internally, there is "some" improvement in our Psychology Composite, but not many of the individual indicators are in the "green" zone - the zone in which the cracks in the "Wall of Worry" have been totally filled.  As you can see in the chart below, the NASDAQ 21-Day Oscillator dropped to the -60 to -70 range last week, which is usually a sign that the market is correcting a prior overbought designation.  And usually when this indicator has rolled over and drops below the -50 line, you see the real market correction low.

The optimism of just a few weeks ago is starting to wither, and this is noticable in the weekly reading of bullish sentiment, which has dropped from over 60% in mid-December 2010 to just 36% last week.  That is good...but in "most" cases, this reading will drop under 25% before the correction is over.  On our website, we keep track of the 3-week moving average of the AAII Survey, which you can see in the chart below.

So...we're hopeful, but we think the correction evolution is still in progress.  At least that's the message from investor psychology and the oscillators.  Admittedly, both of these are used a little heavier in short-term guesstimates of the most likely direction of the stock market.  But when you get to Monetary and Valuation, they tend to have a longer-term vision.  And as we've mentioned several times this year, Monetary and Valution remain strong, as they balance against our weak Psychology reading. 

The bottom line: The bull market is alive and well, and the future economic news will be much better.

To view today's complete Market Comment, click here.

Don Hays

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