Why I Am Still Bullish Equities
Cam Hui | Mar 05, 2012 03:56AM ET
As the stock market consolidates and the Dow flirts with the 13K level, there have been some calls for an intermediate term top. I remain bullish over the next few months for the following reasons:
- The risk trade bull run remains intact
- Positive funds flow are buoying the markets;
- Panic levels are still elevated;
- "Expert opinion, defined as the better market timers, are bullish;
- The Bernanke Put and Draghi Put still lives; and
- The China property bubble lives on for another day.
If you were to view the stock market through the lens of the risk-on/risk-off trade, then the risk-on bull move remains intact. Consider this chart of the relative performance of SPY against IEF, which shows a short-term relative uptrend in the context of an intermediate term uptrend.
Positive funds flows
Mark Hulbert writes that there is some disagreement about prominent Dow Theorists about the significance of this divergence:
"Frustratingly, not all Dow Theorists agree on an answer. In fact, two of the three monitored by the Hulbert Financial Digest — Jack Schannep of TheDowtheory.com and Richard Moroney of Dow Theory Forecasts — think the appropriate point of comparison is not last summer but late October. And because, near the end of December, the Dow averages rose above their late-October highs, both Schannep and Moroney believe that the Dow Theory is solidly in the bullish camp — notwithstanding where the Dow transports might be relative to their July high."
In contrast, Richard Russell, editor of Dow Theory Letters, says he’s worried about the Dow transports’ weakness and, in part for that reason, is largely out of the stock market.
The chart below shows the relative performance of the Dow Jones Transports against the Dow Industrials. If relative performance were to fall below the 38% Fibonacci retracement support level, it would mean that the bears have taken control of the market.
In conclusion, I believe that equities are consolidating their gains but remain in an intermediate bull phase. During this consolidation period, doubts will appear about the legitimacy of the bull leg, as they are now. My view is that the next major move is up, but I am watching and open to the possibility that I am wrong and a correction can run deeper than I expect.
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