What's Holding Back this Stock Market?

The stock market is going through contortions, and it is going to continue for a while.  At least, that is what the indicators are telling us.  I have to go back and remind myself quite often of where we've come from since this bull market started and the evolutions that have occurred to form the underlying foundation.  I hope we don't have to remind you that we are bullish for the long-term, but for the short-term, we expect this dysfunctional stock market to continue for a while.

We believe that the stock market started becoming dysfunctional in November of last year, as the first fly invaded the punch bowl.  You can see that so vividly in the chart below by watching the downtrend in the percentage of stocks that have continued in a healthy bullish pattern (orange line).  We have shown you this chart quite a bit lately, and we hope that it hasn't become trite, because it is very important.

Click to view larger image.

At the same time, we've been speculating that this stock market is going to look very similar to the one that occurred in 1995 right after President Clinton became more pro-business in the wake of the mid-term election.  So, that is the theme that we've adopted pretty much since we saw our Psychology Composite move to P4 on November 15, 2010.  And since then, our Psychology Composite has deteriorated further all the way to P6 at one time, but today, we're sitting at P5, which you can see below.

Overall, we're very bullish, but we have that one tiny fly in the ointment, investor psychology, that is causing some temporary dysfunction.

Don Hays

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