Stock Market Bullish Tone Continues into 2011

By: Donald_W_Dony

Equity markets have enjoyed a positive tone since mid-2010. Improving fundamentals and rising U.S. GDP have bolstered investor confidence and supported the upward trend of the bull market. A year-end review of several key technical gauges highlights the ongoing strength that is normally associated with bull markets and should remind investors of the opportunities ahead in 2011.

Chart 1 illustrates the percentage of stocks on the S&P 500 that are trading above their 200 day moving average. This long term measurement is currently at 89.20%. This means that the vast majority of stocks are advancing and only about 10% are trending down. Bull markets typically create percentages of rising stocks between 50% and 92%. Though the longer term picture is promising moving into 2011, models suggest that there is an expected short-term correction in March. However, the high percentage of advancing equities in the index implies only a shallow pullback in late Q1.

The Volatility Index or VIX, is another gauge of the S&P 500. The VIX, which is sometimes called the "Fear Index" has now declined down into the "Low risk range" of 18 and under. The present level is 16.11. Historically, levels in this band occur during the mid-portion of a 4-5 year bull market (Chart 2). For example, in the last bull advance (2002-2007), the VIX started to traded below 18 in 2004 and basically remained under that line until the second half of 2007.

The final chart greatly reflects on the 'health' of the U.S. economy. The Housing Index (HGX) is a leading indicator on the U.S. housing market. It is difficult for an economy to recover from a recession without stabilization and growth in this important sector. HGX has been gradually advancing since the low in early 2009 (Chart 3). As the U.S. economy continues to heal from the financial whirlwind of 2008, HGX is expected to slowly rise in 2011. The target is 140-160.

Bottom line: The S&P 500 has the underpinnings for additional upward movement into 2011. Q1 represents the theoretical mid-point of the 2009-2013 bull market. This suggests next year should provide higher numbers for the stock market. Fundamental and economic considerations are also on the rise. Corporate earnings and U.S. GDP are displaying a positive trend. The U.S. housing market, one of the worst affect sectors from the financial meltdown, is recovering.

Investment approach: 2011 will mark the be 3rd year of an anticipated 4-year bull market. Q1 is only the approximate mid-point of the longer term equity advance. The elements that drive stock markets higher (improving GDP and corporate earnings plus rising investor optimism) are all in place. Investors are encouraged to stay invested and take advantage of the expected increase in stock index prices next year.

One of the main theme that should start to emerge in 2011 is inflation. The near endless printing of U.S. dollars, the decline in value of the American currency coupled with the growing appetite for commodities are the headwinds of inflationary pressures. As a result, oil is expected to trade over $100 by Q2, copper should reach $4.60 and gold is anticipated to hit $1600 in 2011. Agricultural grain prices, which have already advanced by 20% in 2010, are on a path to rise further next year.

Investors may wish to continue overweighting natural resources and emerging markets in their portfolios. This trend is anticipated to offer higher than average returns next year and into 2012.

From my family to yours, we wish you a very Merry Christmas and a profitable 2011.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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