The stock market bottomed in a generational low in March of 2009, which was built over the previous nine years. The Secular top came in 2000, in one of the most overbought markets in history. If you were around then, you will remember the press saying, "its different this time". I have heard "it's different this time" so many times, it insults my intelligence. Nothing is ever new in markets. The only thing that changes, are the levels of Fear and Greed, which can go to new extremes. But even at the lows in 2009, the levels in sentiment did not reach the Market Vane Sentiment numbers extremes. Sentiment reached 20% bulls the week of October 14, 2002 when the SPX bottomed at 768.63. The week of March 9, 2009 Market Vane Sentiment reached 32% bulls when the S&P reached its climatic low of 666.79 in the cash SPX. The true sentiment low of the past decade came the week of July 29, 2002 at 17% at 775.68 the lowest weekly reading recorded from Market Vane ever. That set up allowed an easy call for the Macro low in October 14, 2002. The lower low in price and higher low in sentiment was a massive bullish divergence. From the 2002 lows the market rallied in a bear market rally to new highs at 1576.09 the week of October 8, 2007. Sentiment reached 69% into that high, which was a bearish divergence from the 74% attained the week of April 30, 2007. The sentiment reading currently from Market Vane is 48%, which is nowhere near overbought. Best to note these points of reference to allow you to have some idea how much room in sentiment there is for the market to move higher. It could 2 years before sentiment wise the market becomes overbought. If you knew nothing else about the SPX, you could have just used sentiment to get direction. This simple yet effective tool and understanding how divergence's get created will allow you to adjust to the market and position properly.
Is the situation changing for the better or worse on the inflation front? Rates are so low and the Fed has repeatedly said that they wish to error on the side of inflation. Is Gold going to succumb to the pressure of higher rates? Does gold have any reason to rally when the stock market is moving higher and is it a necessary asset class to own at this point? I will give into whatever happens with gold and the CRB chart certainly looks as if the Macro has turned higher.
The dollar chart is in an interesting position. At some point soon, the Fed will move off of zero in the Fed Funds. The economy will start to run better in the fourth quarter and 2011 has all the earmarks of a solid year.
