Investors Business Daily has updated their market outlook from negative to positive. In justifying their strategy change they note the S&P 500’s move above the 50 day moving average, strength in important sectors such as tech, and the increasing number of new highs. This leads them to believe institutions could be more active buyers of equities in the coming weeks.
Using history as a precedent, they see Monday’s rally as an encouraging sign for future returns:
“There are some encouraging precedents for Monday’s follow-through. In 2005, the market posted two follow-throughs that came with index gains of about 1.5% or 1.7%. Those May and October moves produced meaningful market advances.”
Perhaps most important is strength in China, which has no doubt been the engine of the global recovery.
“Another positive note came from the market in Hong Kong, which staged a follow-through of its own Monday. Anumber of Chinese stocks rallied Monday and are U.S. market leaders.”
Nonetheless, they don’t appear to have the same conviction they have had with some of their past bullish calls (which included a March ’09 buy call). Specifically, they are concerned about the weak gains during the recent rally as well as the poor accumulation levels. This makes the rally particularly susceptible to breaking down:
“Although the market has made a bullish signal, questions remain, partly because Monday’s index gains weren’t so lofty. The NYSE, S&P 500 and Dow still have poor Accumulation/Distribution Ratings. Market uptrends always begin with a follow-through, but not every follow-through works.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.