A month ago I posted a note on the S&P, using this "P Momentum Model," arguing that there was some concern that the rally was petering out. Well, a month of solid gains followed up by a breakout to the upside over the first week of November has rotated each piece of this model to the bullish side - for the first time since the March 2009 lows. What followed during that time was a monstrous move off the lows. That is not to say we see the same thing but given the momentum is now solidly in the bulls corner, higher prices are probably in store for the S&P. By year end? That is a tough one given the weak retail sales numbers. While the jobs report was better than expected, we need another month of such to get a confirmation that the employment situation is improving (contrary to what I am seeing).However, when looking at a chart, rationalizing things is not always the best method for looking at where we are going. So lets review quickly the implications of all four models in bullish directions. As mentioned, the 2009 lows led to a monstrous move. Before that, the breakdown in 2007 was a leading indicator of the bear market to come (and the pain that followed). Before this period, we had the 2003 lows that also was a period of rising prices. Before that we had the confirmation of all four models downward in late 2000. In each case, the next 12 months were strong for stocks which argues two things: The market breakout is sustainable and the 1325 level is a possibility now. By year end? That might be pushing it but nevertheless, stock momentum is once again very bullish.
The one caveat is from the chart I posted earlier - showing the extreme condition that the Russell 2000 versus Russell 1000 chart currently displays. In the past a top has arrived when the indicator is overbought. Thus for the next leg of this bull market, the speculative names cannot lead - the large cap names need to. So overall I remain bullish but given the risks from the Russell 2k/1k model and the possible inflation storm around the corner, I am watching intently for any signals that the bull runs out of steam. However, as I mentioned, the P momentum model turns have all resulted in solid market performance in the year ahead. I guess we'll see what wins out.
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