January’s strong upside action has confirmed the importance of the October 2011 low. The rally has now pushed most major market indices above their respective 200-day Moving Averages (Toronto still being the laggard), and 50-day Moving Averages are pointing strongly upwards. As has been noted in a recent Market Comment, the NYSE cumulative daily advance/decline line has broken out to a bullish new recovery high. January’s action also occurred against the downside pressure exerted by the end of a 105-day cycle. This cycle has been quite reliable in the past and proved to be very strong and durable coming out of the October 2011 low; the markets’ strength meant that the cycle matured as a “high”, which is very bullish.
In the mid-December Market Comment we also posed what we termed “the major unresolved question about the markets: was the October 2011 low the end of a corrective period and the beginning of a new, bullish phase or, alternatively, was that low merely one stop along the way in a much more severe and prolonged bearish phase?”
We obviously have the answer. Recent market strength suggests that a new bullish phase began last October. Whether this is the final bullish phase of a 2009-12 bull market (our favoured interpretation at this point), or the first phase of a brand new bull market, remains to be seen. The ability of most major market indices to move above their 200-day Moving Averages and sustain this position for weeks/months is crucial to a continuation of the bullish phase.
The current status of the markets seems to contribute to a growing expectation that a pausing or corrective period will occur sometime in February. There is technical support for this view: the markets have risen for an extended period of time; “rising wedges” (a price pattern that often materializes when rallies are nearing an end) appear to be forming; internal momentum indicators are rolling over; and upside volume is subdued. Most importantly, market indices have entered the zone of overhead resistance established by the topping action in mid-2011.
These technical signals suggest the possibility of a healthy resting period or a pullback on the order of 4-5%, or about one-third to one-half of the December/January gains. Such a correction might take most of the major market indices back to their 200-day Moving Averages (and even below this level for a few days). But if this becomes a widespread expectation, the chances of it taking place will diminish. A more bullish path could then occur – the markets could have one or more brief pauses, and continue barrelling upwards.
In sum, the January Indicator, which says that if the month ends higher than its beginning then the entire year will be positive, has just given a bullish signal. With an increasingly bullish technical picture, all short-term market weaknesses should be treated as buying opportunities. The “wall of worry” remains in place and the bulls seem to be in the mood to provide more upside surprises.