Earnings Season Winds Down

We can see in the enclosed sections of the chart below that the last three quarters have enjoyed pretty strong gains in the month that earnings reports were coming out...but we're sitting here this morning, and despite the sharp gains last week on the stocks of companies reporting BIG upside surprises, you can see that only 62% of the stocks on the S&P 500 and S&P 400 are trading above their 50-day moving average.  Not all that impressive is it?

I don't have to remind you AGAIN, but January started this year off with a bang, and if you put it in total context, the market conditions as described by Psychology have improved "some," but all those cracks in the "Wall of Worry" that were growing apparent in January and February have not been totally repaired.  That doesn't guarantee anything, but it does give us a hint that this market might have to spend a few more weeks or months before it is back in the celebration mode again.  But to kick this week off, we can report that our Psychology Composite has improved to P4 this morning.  This is not something to jump up and shout about...just a natural evolution that goes with a cooling off of January's enthusiasm.

So now, let's look briefly on the slight improvement that helps to at least get our Psychology Composite back in the yellow zone.  I have always believed the 10-day Arms Index sends very important messages about how aggressive traders are in the buy and sell decisions.  It effectively measures the energy being required to move markets up or down.  Take a look at the 10-day Arms Index for the NASDAQ below.

You can see above that as January's enthusiasm was running hot, the traders (renowned for being wrong) were using huge upside volume to create those gains.  They had three different buying sprees, but the Arms Index was suggesting that their fuel tank was  showing some gradual dissipation in their enthusiasm.  The correction that we had leading up to last week's action did refill the fuel supply as the Arms Index came down to the levels that often mark correction lows.  Furthermore, you can see this internal correction even clearer in the chart we showed at the beginning of this post highlighting the stocks trading in relation to their moving averages.

Yet overall, we continue to remain very bullish for the long-term until our Asset Allocation Model tells us that it is time to be cautious.  All corrections should be considered as just that - corrections in an on-going bull market.

Have a great week,

Don Hays

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