I pulled this chart at 3:10 PM on
July 1. Happy Canada Day for my fellow Canadians and
Happy Independence Day for my American friends! This has
been the best week since September 2010. The indicators
show the market has pushed back above the 100 and 50 day
EMA. The market is nearing the top before the S&P fell
on May 31. All the indicators are now showing an
overbought market. The volume though has almost doubled
from the first few up days when the market turned. This
is a great sign. The Ultimate Oscillator is showing too
much exuberance on the part of investors, with a very
bullish 82.12. Even though the market is overbought, I
think the odds are pretty good we can break through the
May 30-31 high. I do believe though we could go sideways
for a while and retrace some of the latest upturn before
challenging the April High.
The fact that the market is flashing
overbought does not necessarily mean a pullback right
away. The market can move higher and an overbought
condition can last longer than analysts think. The last
overbought condition lasted 5 sessions. (I have marked
it on the chart below)
The Slow Stochastic is also flashing
overbought BUT NOT A BEAR FLAG and MACD is also warning
of the same condition, with a bullish reading of 7.87.
The technicals point to terrific exuberance on the part
of investors. In this upturn it is a variety of stocks
that are making big gains but not the large defensives
because they did not fall far enough. Microsoft for
example and Intel have had great moves as they recover
lost ground but stocks like Johnson and Johnson and
Clorox didn't fall very far so they have less territory
to reclaims. I believe for some of these big defensive
stocks to make new 52 week highs, they are going to have
to show increased earnings, otherwise any move higher is
suspect, in my book.
Below is the VIX chart. It is down another 6% today and
look at where it has ended up. We are back to levels
that have held for the past 6 months. A definite sign
that investors are unconcerned now that the Greek Debt
Crisis has been kicked down the road.
Last chart, below is the XLF Financial Index. While
still in its own bear market, the XLF reflects the same
attitude from investors. It is rising. It has a very
long way to go to get out of its bear market. But
staying above 15.00 is a good sign for the short term
anyway. Should it fall back below 15.00 I will be
starting again to raise cash.
SUMMARY
I believe the July rally is well
underway. How high it can go I can only guess, but I do
believe the oversold condition will hold the market back
a bit, or even see a retrenchment which for short term
dip buyers will be another opportunity. Since so many
will be watching for a pullback, it may not occur. I do
not see any indication of a severe correction in July,
beyond what June provided. Who knows, perhaps the rally
will continue into August. If it does wouldn't it be
great to revisit the Feb highs this summer rather than
in the fall. Wouldn't that shock a lot of the analysts
who predicted a crash coming in June and announced that
the bull market was over? I am back selling puts and
covered calls but I am still staying at the strike
levels I have determined are fair value for the stocks I
am in. I am not interested in being assigned at
valuations that I believe are too high.
