The Week Ahead: Bull Sheds Sheep's Clothing

July 31, 2016 | July 2016 Bond Updates

As the stock market heads into the last day of the month a lower weekly close is a real possibility but instead we closed mixed. The Spyder Trust (SPY) has recorded strong gains over the previous four weeks. A lower week close would not change the intermediate term outlook but would be consistent with the recent shift in sentiment. In the latest AAII survey the bullish % dropped 4.2% to $31.3% as it appears they are becoming more skeptical about the market's rally. Over 40% are still neutral on the outlook for stocks while 28.4% are bearish. There does seem to be more of a shift to the bullish camp by the financial press and media as they are belatedly jumping on the bullish bandwagon. Bull-In-Sheeps-Clothing In my April 25th column " A Bull in Sheep's Clothing?" I made the case why "the current market is a "Bull in Sheep's Clothing" as the market's underlying strength is being camouflaged. The strong action of the Advance /Decline lines (see market Wrap Section) is a clear sign of the market's underlying strength and the low level of investor participation it is a strong indication that a new high in the averages will not coincide with a major bull market top." At the time most on Wall Street did not believe in the rally from the February lows and some felt we were in a bear market. I pointed out that historically real bull market tops generally coincide with a high level of optimism and bullishness. That is certainly not the case now and in April I thought that if "we do see new highs I would expect to see a surge in articles that argue that the bull market is over." The new highs in the S&P 500 and the major advance/decline lines has helped to uncover the bull market but it will likely another strong rally phase before the bullish camp will get crowded enough to set the stage for a more severe correction. My analysis last week focused on previous instances where the NYSE A/D line had broken out of long-term trading ranges. It supported my view that in the months ahead stocks are likely to be much higher. It also illustrated that there are likely to be bumps along the way which will keep many nervous investors from becoming too bullish.

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