Dan Sullivan Now Appears to be Bullish

By on December 25, 2010

After spending the last several months doubting the bull market move, it now appears that Dan Sullivan, editor of The Chartist, has capitulated and joined the bullish camp.

Since our last letter, several key indices have recorded bull market highs. The strongest move was turned in by the Russell 2000 [small-cap average], which broke through its early November highs as well as its April 23rd bull market highs with authority. The S&P Small Cap Index as well as the S&P Midcap Index are exhibiting similar patterns and are in clear-cut uptrends.

The Value Line Geometric Index also closed at bull market highs. This index, consisting of 1,700 stocks, represents approximately 95% of the market value of all securities and gives a strong indication of how the average investor is fairing. Its ability to record new bull market highs is very encouraging.

We are also encouraged by the fact that on Dec. 1 and Dec. 2 upside volume exceeded downside volume by 13.3 to 1 and 5.6 to 1. Frequently you will see upside volume lead by ten to one or more during a single session but with little follow through the following day. During the last bear market there were several occasions in which this occurred.

The one-day rallies were certainly impressive, with upside/downside ratios coming in at 20.9, 19.6, 10.1, 18.3, and 18.8; however, the follow-up readings frequently saw downside volume leading, and when upside volume led, it was always under two to one.

The last time upside volume exceeded downside volume by ten to one with a follow-up reading in excess of four to one took was on Aug. 31 and Sept. 1 with readings of 24.67 and 4.99. Over the next month, the S&P gained 6% and two months later was closing in on a 10% gain. Going back still further, upside volume exceeded downside volume by 21.1 to 1 on July 7 and 4.4 to 1 the next day. One month later the S&P was 14.5% higher.

Sullivan doesn’t find the recent bullish sentiment on investor’s part as necessarily being a problem:

One negative that many analysts are focusing on is the recent numbers from Investors Intelligence which now show 56.2% in the bullish camp, the highest reading since late 2007, versus 21.3% bears. No question, in most instances this preponderance of bulls calls for caution, but it is not always the kiss of death. In mid 2003, which was very early in the last bull market, the percentage of bulls hit 60%. The bullish contention jumped above 60% in December 2004, which was in a bull market that still had close to three years to run. The bulls hit 60% in December 2005—the bull market lasted another 2 3/4 years.

It took awhile for Sullivan to realize a trend was in place, but he now suggests to stick with it:

Our great lesson to be learned from this period is that it pays to follow the price action of the market. We cannot emphasize enough the importance of staying with the market’s trend.

Source: Moneyshow
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