Don't Count Your Chickens Yet

That old adage of "don't count you chickens 'til they hatch" comes to mind as I look at the stock market and the recent evolution of our Pyschology Composite.  As you are aware, we have put the short-term expectations in the cautious stage since the end of August, as our Psychology Composite, and many of our overbought/oversold indicators, turned a little queasy.  It wasn't a death knell, since Monetary and Valuation remained so positive, but it certainly was our advice to tread carefully.  This was on top of our bond momentum gauge turning negative suggesting that it was time to sell bonds (you can read more about that indicator by clicking here).  That often is a positive sign for stocks, and we believe it is this time as well, but for the next few weeks at least, we'd still suggest to tread carefully.
Following the market action of the past few weeks though, our Psychology Composite is actually right on the threshold of moving to P3 (from its current level of P4), so the recent market decline has helped the composite improve.  At the end of August, the composite was very, very, very close to sneaking across the threshold in the other direction to a negative P5 reading, so we're much closer to counting our chickens than we were, but we're not quite there yet.
For example, while a few of our indicators such as the McClellan and 21-Day Oscillators for the NASDAQ are moving back into more oversold territory (as seen in the chart below), we're still witnessing a very dysfunctional segmented market and value stocks have more recently been outperforming growth stocks.  I never really love a bull market unless average Technology stocks are leading the parade.  That is the epitome of a "healthy" bull market, in my opinion.
However, despite the short-term oscillations and actions in the market, the one thing to remember is that bull markets don't end until monetary liquidity (the fuel) starts to starve the machine, and today, our Monetary Composite is still showing a fuel tank running over with excess fuel.
Don Hays
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