First, I want to wish a late Happy Thanksgiving to my US Clients. There is much to be thankful for as we approach 2011. In this report and my Video Market Updates which are posted in my blog I hope to convey just how healthy and vibrant the current bull market (uptrend) is and why it will continue into 2011. I have been traveling for the past two weeks and am currently in Vietnam.
The market this year has been acting well. 2010 began strong and posted new highs in April. We had the 15% summer correction which found a low and great buying opportunity in July and now a rally right back to the previous April highs. The market is being bought by professional investors (banks, institutions, funds). You can see this in the chart above which represents the US Small Cap Stocks (Russell 2000).
Yes, the news remains pessimistic but that is normal in bull markets:
- Fears regarding Europe’s sovereign debt crisis
- Ireland working on a bailout agreement with the EU and IMF
- Worry’s about Portugal and Spain
- North Korea fired artillery shells into South Korea recently putting the Korean Peninsula on the “brink of war.”
The news is reporting all that can go wrong. But the stock market is a forward looking indicator. It is moving higher now in anticipation of future good news coming. This is how all bull and bear market cycles work. I expect once the dark veil of pessimism is lifted we will see the public investor begin to return and much higher stock prices.
Bull Market Alive and Well
The market has been hit by bad news and concerns about the economy and specific country crises but it has easily been able to shake off that bad news and continue higher. This is a classic sign of a powerful bull market. Do not let the market or negative news shake your confidence.
Let’s look at a few charts: First the Dow Jones Transport Index.
One leading indicator that the global economy is improving is the Dow Transportation Index, shown above. You can see it dipped over the past 2-4 weeks but just last week hit a new high. This is a major positive as the stocks that move our global products are being bought.
Small and Mid Caps are pulling Away!
Once a bull market begins it is usually lead by the small and middle sized stocks. These stocks tend to have strong earnings and sales and recover quicker out of a recession than the large cap stocks. In the chart above, you can see the mid and small cap US indexes up 20% verses the large cap US S&P 500 only up 9%. This is a very positive sign the US economy is improving and will continue into 2011.
Base patterns of individual stocks form during corrections
90% of base patterns form during corrections, when the news is horrible. This allows leading market stocks time to pause and then move higher out of a consolidation. For instance, look at International Rectifier in the chart below. It formed a cup shaped base over the summer 2010 correction and then blasted higher four weeks ago, a sign of strong institutional buying. The stock has refused to give back any gains, another sign that professional investors have a strong appetite for growth stocks.
Also, this week the semiconductor stocks continue to lead. You can see above the summer correction outlined in the box and now just last week a break to new highs. It is always a good sign when technology stocks pace the market.
Conclusion: The market continues to act well. I expect good news to begin to replace the pessimistic news as we enter 2011. Stocks, ETFs and leading sectors are confirming the strength of this bull market. All client accounts are positioned for growth and taking full advantage of this strong market.
Thank you for reading.
