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During the quarter there were…

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Stock Market, Sentiment, and Trend

Dow Jones Industrial Average   10,543
Value Line Arithmetic Index   1732
30-Year Treasury Index 4.82%

The Big Picture for Stocks: As to the 4-year cycle, the bull phase began in 2002. Investors should focus on the coming bear market which should extend into 2006.

Technical Trendicator (1-4 month trend):
Stock Prices   Down
Bond Prices   Down

The attached chart on the Value Line Arithmetic Index summarizes the intermediate picture. We are overbought and have apparently rolled over to the downside.

Also of note is that an average of three sentiment indicators that I track (Consensus, American Association of Individual Investors, and Market Vane) has reached an extreme. The 3-week average of those bullish in these surveys reached 66% the week of November 26. This has been high enough for a top in some intermediate trends in past market cycles, but has sometimes peeked at slightly higher levels. For example, the average of these indicators reached 70% bullish in January of this year before turning down the last week in January.

Trend as well as level is also important in interpreting these numbers. If you assigned a sell signal to the week that the 3-week average of these indicators turned down back in the week ending January 30, 2004 - this sell signal preceded the actual top in the blue chip averages by two weeks, and was six weeks prior to the actual top in the mid-cap indexes. But there was only limited upside progress in the market from the time of the sell signal.

Using the same parameters to define a sell signal (a decline in the 3-week average of the sentiment surveys), we got a sell signal the week of December 3.

So it is not impossible to have a bit more upside, or at least a little more time, before a more protracted slide. Seasonal tendencies would support the idea of more rally, as the market usually does well from mid December into mid January.

But given the picture of the market you see attached, I would not bet much that there will be another good chance to sell.

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