Dow Passes 13,000, but Internal Market is Correcting

I don't really need to bring this to your attention again, but as I've been saying, the stock market is VERY dysfunctional.  While the press is headlining the Dow Industrials moving above 13,000, even it has been showing very poor relative strength this year.  The broad stock market has not liked February, and except for a few sectors, it started a correction at least 3 1/2 weeks ago.  You can really see the dysfunction in the tables we showed last Friday, which you can review by clicking here.

We had guesstimated early this month that the "market" (meaning the broad market) needed to rest for a few months.  That "rest" could either take the personality of a decline in the indices or a period of dysfunction.  For sure, this month has show dysfunction, but we still believe we have more "resting" to get through before this bull market is ready to romp again.

Watching some of our overbought/oversold oscillators is a good way to get a "feel" for the internal mechanisms of the market.  The recent action of the McClellan Oscillator - especially with the new "13,000" celebrations - is really amazing.  Just take a look at the chart below.

Click on the image above to view a larger chart.

We've seen some similar action before, and as shown above, the internal weakness led to external declines in the indices themselves.  We do expect that, and as we've previously said, we are guesstimating that this might be a 3-month affair, or a least a 2-month lull, as we worry about the impending 1st quarter earnings.

However, despite the short-term yellow light, we still remain bullish on our long-term outlook, and a correction here would serve to strengthen the long-term infrastrucure.

Don Hays

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