The short signal generated last week on the S&P500 remains in tact and will remain so Monday if SPX stays below 1,374.5 (Friday’s high). However, this signal is coming in the mist of a very strong uptrend and we are not willing to question that trend based on the current technical backdrop. We remain buyers on dips as it has proven to be an extremely successful strategy since we first recommended it way back in October. Why? Because we still see too many non-believers in this rally.
Why should people not believing in this rally be considered bullish, you ask? Because that represents that many more people who could change their minds and step into the market. When people are bearish, or pulling money out of stocks, it can be assumed it is because they think the market is going to move lower. From a contrarian perspective though, all of those people add to the potential buying power that could come into the market at even higher levels which would push markets even higher.
Check out the following exert:
“According to mutual-fund flow tracker EPFR Global, individual investors have pulled $8.3 billion out of U.S. stock funds since the beginning of the year and sunk almost $10.6 billion into bond funds.”
- The Wall Street Journal, March 1, 2012
These individual investors look even more silly when you consider that through February, there have been 27 positive days for the SPX, compared to just 13 down days. That is the highest percentage of up days (68%) since 1995. The bearish indicator would be if we were seeing individual investors buying stocks hand over fist as the market was climbing to multi-year highs. But this is not the case. That is why our long term thesis remains unchanged. In the short term, keep your eye on the VIX and USO as they’ll likely dictate the action in the days ahead.
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