Despite the fact that the indexes were turned away at important resistance following nice short-term gains, it appears that there could be further upside before this move ends. The indexes have not yet moved to an overbought condition on a short-term basis, which would have limited the upside from here. Also, there has not been a spike in the number of new highs on either the NYSE or the Nasdaq, which often signals short-term tops on the indexes.
For the most part, the volume internals on the Nasdaq have reversed and are now in bullish configurations. The up/down volume measures we follow had turned bearish, which we alluded to in our comment two weeks ago. At that time, and fortunately, we overrode those negative signals because of the seasonal market strength that we expected and the fact that the same set up occured after the major bear market low in 1998. The advance/decline line of the Nasdaq up/down volume is back in a bullish mode, while the 6-day summation of up/down volume flashed a buy on Thursday. We would still like to see the 10-day summation of up/down volume turn positive but that is likely to happen sometime next week.
Another interesting similarity between the current rally and the bottom off of '98 is the Investors Intelligence poll of newsletter writers. At the bottom in 1998, bullish advisors minus bearish advisors hit -11.1%. After 14 weeks and a substantial rally, bulls outnumbered bears by 23.9%. The total change for this period amounted to a 35 percentage point swing, which over a 14 week period, was the greatest change since early 1991 or after the major bear market low in 1990. At the bottom in September, 2001, bears led bulls by 8.4 percentage points. After 14 weeks, bulls minus bears has reached 21.5% for a change of almost 30 percentage points or a very similar change to that during the 1998-99 period.
While we have not been alone in our concern in the turnaround of bullish sentiment in this poll, the above data may suggest that during the initial stages of an advance after a major bear market low, the substantial increase in bullish advisors and decline in bearish advisors during this time of the market cycle may be an indicator that should be ignored.
A real positive of the advance since September has been the ability of high growth stocks to hold their breakouts. This is something that has been sorely lacking over the last year. It suggests that institutions are once again comfortable owning more aggressive stocks and are willing to pay a premium for them. Along with this, while the large cap technology stocks are nowhere near breaking out to all-time highs, some of them are pushing out of substantial (9 months to 15 months) bases to 52-week highs.
We see further gains in the short-term, but will remind you that that there is plenty of resistance overhead for the market to deal with and that gains will be staggered from here. Arbeter is chief technical analyst for Standard & Poor's