The Stock Market has Rebounded. Now What?

Oh how I'm always glad to put October to bed.  I recognize it is not the weakest calendar month of the year, but it has a reputation of raising havoc if it sets its mind to it.  From the widely heralded weak third quarter, October has come back very strong.  Maybe we should thank The Economist - the magazine that has taken over the role that BusinessWeek used to play of heralding major turning points by whatever they put on their cover in the bleakest times - and its magical ability to reverse the trend.  So, let's give our thanks to The Economist.

Let's look at this market to put it in perspective.  In the sector studies that we produce each week, it is very obvious to see that there are a lot of moving parts in this "market," so let's look at the "market" from three different views:
  1. You have to begin with the S&P 500, which is weighted down by those large-cap financial stocks.  Over the last 31 months, these financial stocks have experienced a rally, a correction as signs of an impending "double-dip" recession appeared, another rally after the mid-term elections that gave a much more pro-business tone, and then the abuse that we saw in July and August of this year.  However, with these financial stocks tied around its neck, the S&P 500 still has its higher high, higher low bull market intact.  Furthermore, last week we saw this index make a very nice upside breakout from the 9-week exaggerated correction that we were previously experiencing.
  2. Next, you have to look at the S&P 400 (mid-cap stocks).  While this index also got squashed in the debacle in July/August, if you look at this index's actions off the bottom in early 2009, it's bull market is still intact and the recent action appears as nothing more than a correction.
  3. Lastly, the equally-weighted ValueLine Arithmetic Index provides another perspective of this market's recent actions.  No index is perfect, and this index has its flaws as well, but it is pretty good to describe what is happening to the average stock.  While the stocks in this index are rebalanced daily, causing you to constantly average down a little, this flaw is not that serious.  During the most recent correction low, the ValueLine Arithmetic Index came very close to breaking that low from last summer's correction, but in general, we've seen a persistent trend of higher highs and higher lows...and we expect that trend to remain intact.
After last week's strong upmove, our Psychology Composite has moved down to P3 (of its six levels - 1 being the highest & 6 being the lowest).  However, with our Monetary and Valuation Composites still in their most bullish positions, we still have our three "Warriors" fighting the Battle for Investment Success and Survival in place as we continue to watch this market.

Don Hays

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