3 Reasons Why I Remain Bullish

  • August 15, 2005
  • Thomas Neuhaus

I remain bullish because the S&P 500, Russell 2000 and S&P 600 are
all in
well-defined up-trend channels.  The Bollinger Band Width
measurement indicates that the S&P 500 is being compressed, meaning an outsized
move should occur shortly. I believe that move will be higher because the S&P
500 has consolidated above support from three previous attempts at new highs.

 


More specifically, the S&P is currently forming a triangle consolidation. A move above
1237 would indicate a break-out  while a move below 1226 would be
worrisome.  

 

And while the S&P 500 holds above support, the real key to the market’s
direction lies with the leading Russell 2000 and S&P 600 indexes. Both
indexes are currently resting right on support from a rising channel. The small
caps need to rally from this point forward, otherwise, they will break their
channels and signal a further consolidation and potentially, a breakdown. I will be monitoring the
Russell 2000 closely because it has already broken a steeper trend line. 
While I expect the indexes to remain in their up-trends, I will become more
defensive if the Russell 2000 breaks below 654 and S&P 600 breaks below
344.

  

 

The bears will argue that sentiment is too bullish to support new market highs.
They point to increased speculation in such stocks as Google
(
GOOG |
Quote |
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PowerRating)
and Baidu.com
(
BIDU |
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PowerRating) as a sign of an over-heated market. However, a fairly
well known indicator is showing that speculation is actually running towards the
lower end of historical extremes. The NASDAQ volume/NYSE volume indicator
reveals that speculation is quite subdued. The higher the level of NASDAQ volume
compared to NYSE volume, the higher the speculation in the market. As a
historical guide, during the year 2000, NASDAQ volume was running almost 2x NYSE
volume. Currently, the ten day moving average of the indicator is closer to
1.0x, which has marked bottoms, than 1.5x, which has marked tops, in the recent
past.

 

 

In addition, bears have argued that the high number of bulls in sentiment
surveys is a major negative. And while the sentiment surveys reveal a fair amount of
bullishness, the total number of bulls stands at much lower level than previous
market tops.  I find it helpful to aggregate the various sentiment surveys
(AAII, Market Vane, Consensus and II) into a single indicator. The
following chart shows that the total number of bulls in all surveys is lower
than last year’s readings despite the fact that the S&P 500 remains near
multi-year highs. I believe the study reveals that sentiment will have to
become more bullish before it marks a more significant top.   

 

Thomas Neuhaus is a principle of Investment
Management of Virginia, a registered investment advisory firm for which he
co-manages. Mr. Neuhaus’ career has encompassed all aspects of the investment
business from investment banking to sell-side research to buy-side portfolio
manager.

Prior to working on the buy-side, Neuhaus worked as the head of technology
equity research for BB&T Capital Markets, where he covered the business services
and business intelligence software sectors.

From 1994 to 1997, Neuhaus was an Investment Banker for a regional investment
bank, completing initial public offerings, mergers & acquisitions, and private
financing for Business services, Telecom, Internet and Software companies.

Tom graduated from the University of Virginia with a degree in Finance.

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