Despite a weak global economy, markets continue to rise, and investors should stay in, says Dan Sullivan of The Chartist.
The market's overall momentum has been persistent and well above the norm. The ten-day moving average of advancing stocks versus declining stocks got up to 1.68 on May 6, which was the highest reading since mid-January.
There has also been a dramatic turnaround in the percentage of stocks that are above their 200-day moving averages, which is now up to 74.8% versus 65.1% on April 18. On top of this, the number of new highs has expanded dramatically, with the Advance/Decline Line recording a series of record highs right along with the key averages.
There's no question that we are in a powerful bull market, with pullbacks being limited in scope. Since the November lows, there have been three mild pullbacks that have lasted seven, four, and five days, with the S&P 500 losing 3.07%, 2.81%, and 3.25%, respectively.
The latest from Investors Intelligence now shows 52.1% in the bullish camp, which is the highest level in 12 weeks. The American Association of Individual Investors' (AAII) weekly poll has the bullish contingent at 40.8%, versus 24.7% bears. This marked the first time since April 11 that the bulls have been in the plurality.
The stage could now be set for some profit taking. However, we expect it to be mild. It continues to be our contention that the real correction is going to come from higher levels. The real danger, as we see it, would be a runaway move to the upside, entailing a sharp increase in volatility.
Besides the record-breaking performance of many of the widely followed indices, the big news has been the recent action by the European Central Bank (ECB) to lower its key policy interest rate by 25 basis points, to a record low 0.5%.
The rate cut comes after a string of poor economic news, including unemployment in the Eurozone reaching a record high of 12.1% in March. Additionally, Germany's manufacturing purchasing managers' index (PMI) fell into contraction in March and declined further in April.
The European Union's severe austerity programs, many contend, counteract the stimulus measures. The drastic spending cuts and tax increases aimed at reducing the debt levels of the most troubled countries have yet to produce the desired effect.
Deficits have declined, but debt burden has risen as the recession has resulted in less taxes paid by companies and households. Portugal's deficit increased to 6.4% of GDP in 2012 from 4.4% in 2011, and Spain's deficit rose to 10.6% from 9.4%.
Despite the economic tumbles in the region, the stock markets have done very well indeed. Recently, the benchmark Stoxx Europe 600 closed at its highest level since June 2000, posting a gain of nearly 22% over the past 12 months. The German Dax Equity Index posted an all-time closing high.
Even the countries that are suffering the worst economic hardships have seen stock market rallies. Year-to-date, Spain has risen 4.8%, Portugal 10.8%, Greece 17.5%, and Italy 6%.
Since the November lows of last year, the Vanguard European ETF (VGK), which is in our Traders Portfolio, has gained 17.7%. Over the same period, iShares Spain (EWP) has gained 16.8%, while iShares Germany (EWG) is up 20%.
The skeptics feel that investors in European markets are ignoring the preponderance of adverse news—similar to the US. In our opinion, they are missing the mark. The ability of stock markets both European and domestic to shrug off bad news-which they have done repeatedly—is highly bullish for their prospects going forward.
Our advice for both long-term investors and traders is to stay fully invested.
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