A Bear Rally or a New Trend? | Stock Market Investing

Saturday, April 19, 2008 | Home | Andy Mayo

Last week was the first really bullish week we've had since the end of January when the NYSE composite closed the week at 9277.58.  Friday's closed bested that mark with a close at 9310.24.

The percentage of stocks above their 200-day moving average has risen 80% in the last four weeks while the percentage of stocks showing a bullish point-and-figure pattern has rise 63.5% and closed Friday right at the 50-week moving average.  The chart is posted in Newsletters.  Check the chart in the March 14 post for comparison. 

Another bullish indication is the clear break in the Volatility, or "fear," Index.  When the VIX falls, stock prices rise.  In October and again in December, the VIX fell to its support line and then bounced higher.  This time rather than bouncing up it crashed through the support line which now becomes resistance.

However, with a close at 20.13, the VIX has not reached bull market territory yet. During the last bear market, the VIX fell below 20 on two occasions and subsequently rose to over 40, sending stock prices lower each time.  We're not out of the woods yet, but we seem to be headed in the right direction.

The Yen downtrend is also bullish for US stocks.  The Euro is overbought and could see a pullback shortly.

Having made the bullish case for US stocks, I admit to expecting a pullback on Monday, statistically the worst day of the week for the market.  One test of our trend will be the depth of the pullback. 

And then there's this to think about:  going long as we approach May is counter to one of the market's long-standing maxims:  "Sell in May and go away."  On the other hand, the market's long-standing belief that the best period to own stocks is November through April has been badly battered.  The S&P 500 Index was down -9.9% in the first 3 months of this year.  Last week's rally left the index down -3.9% for the year.  Six of the last seven times this happened the market was even lower at the close of the subsequent six months.   Charts are courtesy of StockCharts.com.

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