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Breadth/Fed Stimulus Encouraging to Bulls

The disappointing housing news of December 28, 2010 gives the Fed more cover to complete the full allotment of QE2 bond purchases, which in turn should help boost weak dollar assets like gold, silver, and copper. From a Bloomberg story:

A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Federal Reserve policy makers this month said "depressed" housing and high unemployment remained constraints on consumer spending, reasons why they reiterated a plan to expand record monetary stimulus.

Using charts from the close on Friday, July 23, 2010, we posted the following chart on Monday July 26th with the S&P 500 trading at 1,115. Since we posted the chart below, the S&P 500 has gained 12.8%. Here are the comments from July 26th:

One of the best ways to monitor the health of any rally is to look at the number of stocks participating, which is referred to as market breadth. Wide participation is a sign of a healthier rally; one which has higher odds of continuing for more than a few days. How does market breadth look as of Friday's close? pretty good. The Summation Index (shown below) is an intermediate-to-longer-term measure of market breadth. The Summation Index has made a higher low and recently closed above its 35-day moving average for the first time in eighty-eight calendar days. Both occurrences lean bullish for the intermediate-term.

Chart as of July 23, 2010 Close:

$NYSI

Fed money printing also increases the appetite for stocks. Below is an updated version of the Summation Index as December 27, 2010. Look at past circumstances highlighted by the green arrows at the top and middle portions of the chart. Note the S&P 500's performance following these potentially bullish signals. The blue arrows on the right side of the chart show the current situation relative to market breadth.

Chart as of December 27, 2010 Close:

$NYSI

The attempt at a bullish turn in market breadth (summation index) aligns well with other potentially bullish developments outlined in our 2011 Investment Outlook (Part I, Part II).

 

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