Will the Dow’s Record Streak End with a Bang?

On Monday, February 27, the Dow Jones Industrial Average (DJIA) recorded its 12^th consecutive up day. This is the second longest such streak since 1930 (the longest run was 13 days in January 1987).

The S&P 500 hasn’t dropped more than 1% a day for 104 trading days.

The record gains haven’t gone unnoticed. Many sentiment indicators are in uber-bullish (bearish for stocks territory).

The investment advisors and newsletter-writing colleagues polled by Investors Intelligence are more bullish (63.10%) now than at any other time since 1987. This tumultuous span includes the 2000 tech bubble and the 2007 leverage bubble tops.

The Relative Strength Index (RSI-14) finished February above 70 on the daily, weekly and monthly chart.

However, trading volume has been suspiciously low. Despite solid gains, less than 40% of NYSE volume has been flowing into advancing stocks.

History’s Most Important Lesson

Record optimism and strong gains on low volume … anyone with a bearish disposition could (ab)use those facts to paint a pretty bearish picture.

However, history cautions against that.

Several times throughout the post-2009 bull market – and most recently on December 14, 2016 – the Profit Radar Report pointed out that historically stocks rarely ever top on peak momentum.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The February all-time highs occurred on peak momentum.

The green vertical lines (chart below) mark previous peak momentum (based on RSI-35) highs. None of them market major tops.

The blue lines mark strong rallies to new all-time highs on low volume (less than 40% of NYSE volume flowing into advancing stocks).

Most of those instances were followed by corrective pullbacks, but nothing worse.

Expect the Abnormal

Sometimes stocks simply push the envelope and plow higher than anyone thought possible (the S&P 500 already surpassed the 2017 year-end targets analysts set in December).

The August 28, 2016 Profit Radar Report outlined why to expect such ‘abnormal’ gains.

1) Bullish breadth thrust off the February and June 2016 lows

2) Bullish Elliot Wave Theory patterns

Although the risk of a temporary pullback is increasing, the body of evidence points towards further gains in the months to come.

The historic Dow Jones winning streak is unlikely to be followed by a “thud”.  Any correction should be viewed as a buying opportunity.

Visual forward projections (published back in August, but still valid today) and up side targets are available here: S&P 500 Update – Expect the Abnormal. In fact, the up side targets given in August have been reached. Now what? Here is the latest update: S&P 500 Reaches Up Side Target – Now What?

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

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This is the First Time the Dow Jones has Done This in 105 Years

Assuming this hasn’t put you asleep, you know that the Dow Jones (NYSEArca: DIA) has been taking a giant dirt nap.

In fact, by one measure, it’s the longest dirt nap since 1910, and soon to be the longest ever.

The Dow Jones has not recorded a 1-month high or low (based on closing prices) for 42 days.

According to Lyons Fund Management, the longest such stretch dates back to 1910 and lasted 45 days.

In itself, this is remarkable, but the next stat makes it even more remarkable.

For the past 26 trading days, the Dow has been stuck in a 2% trading range (based on closing prices). This is one of the tightest ranges of the last 25 years, and the tightest range without a new 1-month high or low ever.

 

If you read the Profit Radar Report, this range comes as no big surprise. Back on March 29, the Profit Radar Report observed that: “S&P 500 today is exactly where it was November 18, and there’s no indication that the up and down zig-zagging is coming to an end.”

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Fascinating AAPL Formation Telegraphed Bullish Breakout

The April 22 Profit Radar Report highlighting this fascination AAPL (Nasdaq: AAPL) formation with the following commentary:

“AAPL, the most important stock in the world, hasn’t been able to nudge the S&P, Dow Jones or Nasdaq in either direction. That’s because AAPL is stuck in its own trading range/triangle. The consolidation pattern is similar to that of Q3 2014. AAPL closed at 128.62 today. This mini-breakout increases the odds of more upside.”

 

Below is an update AAPL chart. The next meaningful resistance cluster is around 140, but the open chart gap (and various breadth divergences) allows for a ‘digestive pullback’ at any time. In terms of Elliott Wave Theory, any new high could complete a 5-wave move and result in a larger-scale reversal.

AAPL’s pop also propelled the Nasdaq-100 and PowerShares QQQ ETF (Nasdaq: QQQ) out of a formation called a bull flag. More details here: Nasdaq QQQ ETF Break out of Bull Flag

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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The Only Indicator That Foresaw a Persistent S&P 500 Rally with No Correction

MarketWatch reports that most people missed the recent rally? Why? Obviously because nobody saw it coming. Here is one indicator that persistently suggested further gains (this indicator also explains why so many missed the rally).

I spend a lot of time plotting intricate charts illustrating technical patterns and developments, sentiment extremes and seasonal biases.

Perhaps my most impactful chart this year was featured in the 2014 S&P 500 Forecast (published by the Profit Radar Report on January 15).

This chart combined all my analysis into one simple S&P 500 projection for 2014 (view S&P 500 projection chart here).

If you click on the link above you’ll notice that the projection was about as accurate as anything in the financial world can be.

I’d like to think that charts have value, but the effectiveness of any chart crafted since early May pales in comparison to this rudimentary and unscientific, but uncannily accurate indicator.

Headline Indicator or ‘Blind Guides’

The headline indicator is simply an assessment of media sentiment. Unfortunately, many retail investors listen to the media, making this a helpful contrarian indicator.

Below is a brief chronicle of the media’s uncanny prowess to support the wrong side of the trade along with commentary by the Profit Radar Report.

You’ll be surprised to read just how wrong the financial press has been (the S&P 500 chart below includes even more media headlines).

April 30, 2014 – S&P 500 at 1,884

April 30, Profit Radar Report: “The old and chewed-out ‘sell in May and go away’ adage is getting a lot of play these days. I get suspicious when our carefully crafted outlook becomes the trade of the crowd and a crowded trade. How will the market fool the crowded trade?”

The media’s take:

• CNBC: “Why sell in May adage makes sense this year: Strategist”
• IBD: “Why investors expect to sell in May and go away”
• MarketWatch: Risk of 20% correction highest until October

May 11, 2014 – S&P 500 at 1,878.48

May 11, Profit Radar Report: “How will the market fool the crowded trade? A breakout to the up side with the possibility of an extended move higher.”

The media’s take:

• Bloomberg: “The next liquidation crisis: What are the signals?”
• CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom”
• Bloomberg: “U.S. markets on brink of 11% correction”

June 11, 2014 – S&P 500 at 1,944

June 11, Profit Radar Report: “Different day, same story: Stocks are near their all-time highs, but the media treats this advance with outright contempt. Below is a small selection of today’s headlines. We can’t dismiss media sentiment as retail investors (unfortunately) listen to the media.”

The media’s take:

• CNBC: “Cramer: Prepare for stock decline”
• WSJ: “How long can stocks maintain all-time highs?”
• MarketWatch: “3 reasons why the Dow shouldn’t be at 17,000”

June 25, 2014 – S&P 500 at 1,959

June 25, Profit Radar Report: “It only took one small down day (Tuesday) to reinvigorate media fear mongers.”

The media’s take:

• Yahoo: “S&P’s Stovall says be careful before jumping into stagnant market”
• Yahoo: “’It looks like a peak:’ Robert Shiller’s CAPE is waving the caution flag”
• CNBC: “Wall Street’s biggest bull calls for a correction.”

Irony at its Worst

A correction would actually be healthy, but a watched pot doesn’t boil.

The June 25 Profit Radar Report explains: “The media’s continuous market top calling, artificially extends every rally. We saw this in April/May. Although media pessimism isn’t as pronounced today as it was in April/May, it’s enough to be considered a bullish wild card.

Bull markets die or correct because of ‘starvation.’ The market needs potential buyers to fuel rallies. That’s why good news tops are dangerous, because they suck in so many buyers and leave few sellers. Where there’s no buyer, there’s no price increase. ‘Scary’ media headlines disturb this cycle and provide continuous ‘ammunition’ for the bull.”

Today – S&P 500 at 1,973

On Monday the S&P 500 closed at 1,973. What does the media say?

• CNBC: “Why this could be as good as it gets for stocks”
• Yahoo: “Common sense says look out for a market top”
• USA Today: “History says July is cool time to own stocks”
• WSJ: “Dow nears 17,000 as rally gains steam”

Yes, you saw correctly, there are actually two headlines with a bullish connotation, but the most fitting headline comes from MarketWatch.

“Dow flirts with 17,000, but most people missed the ride”

Hmmm, let’s see if the media can crack the mystery behind the missed rally.

It is obviously premature to order a coffin for this rally (or the entire bull market), but several indicators – one of them is the ‘sudden drop’ indicator – suggest caution.

This ‘sudden drop’ indicator has a flawless record since the beginning of the QE bull market in 2009. Is it reason to worry.

Here is a detailed look at the ‘sudden drop’ index: S&P 500 ‘Sudden Drop’ Index at Historic Extreme

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Contrarian Take: Did Doomsday Prophets Scare the Bear?

Bears are powerful creatures, but they can get scared easily and may suffer from a fear similar to stage fright. Many media outlets have reported sightings of bears, but when everyone expects its appearance, it fails to show.

Baron Rothschild’s famous adage, that the time to buy is ‘when there’s blood in the streets’, is timeless.

History has also shown that the old adage is reversible, meaning that the time to sell is when there’s no sight of ‘blood in the streets’ or extreme optimism.

Is there extreme optimism right now?

Allow me to introduce my very own, non-scientific media sentiment indicator.

A couple of weeks ago value investing icon Jeremy Grantham published his first quarter 2014 newsletter. The topic was a statistical approach to market bubbles.

The Glass Half Empty Interpretation

According to the letter, Grantham believes that the S&P 500 will form a bubble that will eventually burst. The conclusion in his words is as follows:

“But I believe it [the bubble] will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500 (SNP: ^GSPC). I am not saying that this time is different. I am sure it will end badly.”

The financial media (not sure if they read the entire report or not) spun the following headlines out of Mr. Grantham’s analysis:

“Jeremy Grantham on Bubbles: ‘I am sure it will end badly’” – Wall Street Journal
“Jeremy Grantham: Stocks set to crash around November 2016” – Moneynews
“When Jeremy Grantham sees bubbles, it’s worth paying attention” – The Globe and Mail
“Jeremy Grantham makes a very specific call about when the bubble will burst” – Business Insider

This may have gotten lost in translation, but Grantham ‘predicted’ two developments:

1. The S&P 500 will rally to 2,250
2. It will end badly

Yet, I could not find a single article that even mentioned, let alone highlighted, S&P 2,250, which is a pretty bold call.

In fact, bearish financial headlines were so pervasive in early May that Yahoo Breakout ran a segment called: “The boys who cried wolf: Crash prophets on the rise.”

Is someone (hint: media) trying to spill blood on the street?

It Happened Before

This environment reminds me of what we saw about a year ago, when I wrote in the March 10 Profit Radar Report that:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point that stocks are only up because of the Fed. We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number.”

My research (S&P 500 2014 Forecast, published on January 15, 2014, available to subscribers of the Profit Radar Report) proposed a rally towards S&P 1,950 followed by a 10%+ correction back in January.

However, the recent spell of bearish headlines (caused by sideways trading not a correction) made me suspicious. It was time for the market to fool the crowded trade again. I proposed this head fake scenario in the May 7 Profit Radar Report (S&P was as low as 1,860 that day):

“The weight of evidence suggests the onset of a larger correction in May, but we are not the only ones expecting a correction. A false pop to 1,900 – 1,915 would shake out the weak bears and set up a better opportunity to go short.”

We got an S&P 500 (NYSEArca: SPY) pop to 1,902.17 on May 13, but the headlines continue to be bearish. We’ll have to see if the pop was enough to fool the bears and set the stage for a deeper correction.

I will be looking at key support and resistance levels for valuable directional clues.

The most important near-term support/resistance levels are disclosed here for free:

S&P 500 Analysis: The ‘Chopping Zone’ Explained

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Forget Dow 16,000 – Here’s the Real ‘Bubble Popper’

‘Dow 16,000’ or ‘bubble’ or contenders for the fictitious un-word or non-word of the year award. While the anti-appeal of the word bubble may be fictitious, the resistance provided by the Dow Jones Industrials chart is not.

Forgive me for using the much overused “B”-word (bubble) in my headline, but it appears unfashionable nowadays to write any article without a reference to the B-word (I believe there’s a significance to that. More below).

The Dow Jones (DJI: ^DJI) is chipping away at round number resistance at 16,000.

Round number resistance in itself is enough to capture the media’s attention and imagination. Combine this with the media’s eagerness to see a bubble burst and you have a perfect recipe for disaster, right?

The First Bubble Seen in Advance?

This would be the first bubble seen in advance, so a disaster here is very unlikely.

What about Dow Jones 16,000, is it significant resistance?

Yes and no.

Dow Jones 16,000 is round number resistance, the same as 1,800 for the S&P 500 (SNP: ^GSPC). Prices do tend to struggle briefly around round number resistance.

The Dow Jones chart below highlights round number resistances from 10,000 – 16,000 (purple lines).

But there is more important resistance for the Dow Jones and by extension the Dow Jones Diamonds ETF (NYSEArca: DIA).

Double Whammy Resistance

The red trend line goes back many many years and provides more important resistance for the Dow Jones than the round number resistance in itself.

This trend line resistance was first featured in the August 7 edition of the Profit Radar Report and was used as an eventual target for the QE bull market.

Since the two levels are only separated by 150 points, there is stiff resistance in the low 16,000s.

Will the Dow Jones be able to overcome Dow 16,000? Will the S&P 500 be able to overcome 1,800?

Eventually, probably yes. The key is eventually and likely after some ‘short-term damage.’

I don’t use trend lines as a stand alone indicator or forecasting tool. However, resistance levels like the above-mentioned trend line act as ‘technical handrails.’

In particular, I am using this trend line in combination with a duo of indicator that has directly ousted the May, August, and September declines as only temporary corrections.

Here’s what this trusty duo of indicators says is next for stocks:

Divergences and Their Immediate Effect on the S&P 500 (and Dow Jones)

A long-term chart and detailed analysis for the Dow Jones and S&P 500 is available to subscribers of the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

US Investors Own 20 Percent of Germany

Germany is considered the economic locomotive of Europe. The Dax – Germany’s blue chip index – is skipping from one high to the next. This benefits US investors, which own 1 of every 5 Dax shares. One company alone owns 6%.

Foreign investors seem to appreciate ‘made in Germany.’

In the year 2000 foreign investors owned 30% of the Dax, which is the German counterpart to the Dow Jones (DJI: ^DJI). Like the Dow (NYSEArca: DIA), the Dax is made up of 30 (German) blue chip stocks.

Today foreign investors own 55% of the Dax.

For example, 3 of 4 Adidas shareholders are not from Germany. The same is true for re-insurer Munich Re. 54% of foreign investors own shares of the Deutsche Bank (translation: German Bank).

Foreign shareholders own the majority stake of 20 out of the 30 Dax components – there is no Dax ETF, but the iShares MSCI Germany ETF (NYSEArca: EWG) provides exposure to the German stock market.

One of the reasons investors around the globe favor German stocks is rising stock prices (although this is deceptive, see below).

The Dax gained 17% in the past year, which translates into $192 billion of new wealth. Ironically, that’s less than the S&P 500.  The S&P 500 ETF (NYSEArca: SPY) trades 21% higher compared to a year ago.

Still, most of the money flowing into the Dax comes from the United States. US investors own 20% of Dax shares.

Blackrock alone owns 6% of Germany’s Dax. Chinese investors own only 3% of the Dax. No doubt, the Dax gains are good news for US investors.

Unfortunately, the Dax is perhaps the most deceptive index in the world, and the ‘real Dax’ is actually only worth half as much as the Dax on steroids. How can that be? The full story can be found here: The Most Deceptive Index in the World Hits ‘All-time High’

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

Weekly ETF SPY: Nasdaq-100 and QQQ Reversal Candles

The stock market sold off sharply right as Mr. Bernanke spoke before Congress, but there were other – more predictable reasons – for stocks to fall: Sentiment, seasonality and technicals. Here’s the technical analysis that kept investors ahead of the trend.

On April 24, the S&P 500 broke above its all-time high at 1,576. Since then the Profit Radar Report analysis has been focused on the Nasdaq-100. Why?

Unlike the S&P, the Nasdaq-100 (and its corresponding ETF, the PowerShares QQQ) trades well below its 2000 high. There are fewer resistance levels for the S&P 500 – an index trading at all-time highs – compared to the Nasdaq-100.

Support and resistance levels are effective tools to manage risk, so it made sense to switch ‘vehicles.’

The weekly chart below shows the two trend lines we’ve been focusing on. The green trend line goes back to 2008 and is key support. The red trend line served as initial target and now early warning indicator.

Wednesday’s giant red candle high (daily chart) looks significant for a number of reasons:

1) It’s a reversal candle that engulfs the four prior candles and occurred right against the long-term trend line as well as short-term resistance at 3,050.

2) Sentiment was getting too bullish: The May 19, Profit Radar Report warned that: “The increasing number of bullish polls and money flow indicators shows that risk is rising and we will be alert for a change of trend.”

3) Seasonality is about to turn sour as pointed out by the May 19, Profit Radar Report: “Based on post election seasonality stocks are due for a pullback in a week. VIX seasonality projects weakness for late May/early June.”

Reversal candles are not foolproof. For example, a reversal candle for the Dow on February 25 did no lasting damage.

But unlike the Dow’s February 25 candle, yesterday’s reversal was the common denominator of all major markets.

What’s Next?

We looked at the Nasdaq-100 because it gives us the support/resistance levels needed for risk management and low-risk buy/sell triggers. Let’s take advantage of them.

Prices often retest a previously broken support level, so a move up to the red trend line would be a low-risk opportunity to go short. A stop-loss should be used as a move above the red trend line would point to a continuation of the rally.

Selling tends to accelerate when support is broken (this was true with the red trend line). Therefore, a move below the green trend line would unlock lower targets.

Based on past experience, stocks should bounce to digest yesterday’s decline. There’s an open chart gap for QQQ at higher prices. At least that chart gap should be closed.

This week’s ETF SPY is more ‘special’ because it includes information generally reserved for subscribers to the Profit Radar Report. >> Sign up for the Profit Radar Report if you’d like to enjoy this kind of analysis.

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Dow 16,000! Headline Indicator Sways Into Bearish Territory

Is Dow 16,000 possible. Sure. It’s less than 8% away from the April all-time Dow high. But, the mere fact that Dow 16,000 is predicted by one of the most followed money polls, suggests that (best case scenario) getting there won’t be easy.

How do fish get caught? They open their mouth. How do investors get hosed? They follow the crowd.

This rather reliable rule of thumb (don’t follow the crowd) has been distorted by the Fed’s quantitative easing. Yes, prior to QE, investor sentiment used to be a rather reliable contrarian indicator.

Nowadays some sentiment indicators have to be taken with a grain of salt and subjected to additional scrutiny as the Fed has taken the edge off extreme readings and their contrarian implications.

Personally, I like to take a look at the composite sentiment picture made up of sentiment polls, money flows and my own personal headline assessment.

My headline assessment includes projections like last weekend’s Barron’s “Dow 16,000” cover. Here’s what Barron’s wrote:

“The stock market isn’t the only thing that has set records this spring. Barron’s semiannual Big Money poll of professional investors also is setting a record — for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks — an all-time high for Big Money, going back more than 20 years. What’s more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year.”

Barron’s publishes a magazine to make money and to make money you need to write about stuff people like to read. Bullish news does the trick right now. This suggests that a great many of investors are back into stocks, now hoping for higher prices and looking for ‘evidence’ confirming their bias.

That’s not good news for the bulls. In all fairness, it has to be said that Barron’s has gotten their forecasts right a few times recently.

In October 2012, Barron’s predicted new highs and the February 9, 2013 front cover shouted: “Stock Alert! Get ready for a record on the Dow,” and rubbed in the four words every investor likes to read. “We told you so,” and continued: “In October, we predicted the Dow would pass its 14,165 record by early this year. Now we’re just 1% short. Expect a breakthrough soon.”

But Barron’s had its ‘prime contrarian indicator moments,’ such as: “Is $5000/ounce the new target in gold’s run?” in August 2011 or its ueber bullish 2007 big money poll.

It has to be noted that despite bullish sentiment poll results earlier this year, the media was extremely bearish. The March 10, 2013 Profit Radar Report commented as follows on the lack of media enthusiasm:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

From March 11 – April 11 the S&P 500 gained another 46 points. By April 11, the media started to embrace the idea of rising prices more fully:

Bloomberg: S&P 500 climbs to record on stimulus, earnings optimism
Reuters: Dow, S&P close at record highs in broad rally

In my admittedly unscientific estimation of headline sentiment, the media is still not as enthusiastic as it was in late 2010 or prior to the 2000 or 2007 highs.

Barron’s Big Money Poll results are nevertheless concerning and combined with weak seasonality, waning market breadth will probably lead to lower prices.

Dow 16,000 later on in 2013 doesn’t seem so far fetched though. Don’t get me wrong, now is not the time to be short (we went short at S&P 1,590), but I wouldn’t write off Dow 16,000 unless key support is broken.

Dow – Record Winning Streaks Rarely Lead to Lasting Tops

The Dow Jones just extended its run to the longest rally in over 16 years. Common sense would suggest that ‘what goes up must come down,’ but prior instances of prolonged and overextended rallies paint a different technical picture.

If you like superlatives, 2013 is your year. After edging out another gain on Wednesday, the Dow Jones closed higher for the 9^th consecutive trading day. This is the longest such streak since November 1996.

Now, stocks are overbought, volume is waning and RSI is lagging. How Bearish is this for the stock market? How have stocks done after previous 9-day winning streaks?

The sample size for 9 consecutive up closes is extremely small. There’s only one since 1996.

To get a larger sample size and better read, we’ll look at recent times the Dow closed higher for 7 or 8 days in a row.

The chart below highlights all 7-and 8 consecutive day up closes since the 2009 low.

There are two 7-day streaks (July 2009, March 2007) and three 8-day streaks (August 2009, March 2010, February 2011) and of course this year’s 9-day streak (March 2013).

Every 7-or 8-day run was followed by at least one more short-term high within the next two trading days (twice the very next day, followed by marginally lower prices).

In July 2009 and February 2011 the Dow just kept trucking higher. In August 2009 and March 2012 the Dow corrected approximately 4% within days after the streak ended.

Somewhat bigger corrections (up to 10%) were seen about a month after the February 2011 and March 2012 streak highs. All losses were eventually recovered.

It is interesting to note that 3 of the 6 runs occurred in March and (one more happened in February), so March momentum runs are nothing unusual.

The gray/black trend lines in the above chart show important resistance levels, that once broken led the extended rallies (resistance levels were outlined in the Profit Radar Report).

To sum up, the Dow is ripe for a correction, but any correction is likely to draw in enough buyers to bid up prices to new all-time highs.

Since history doesn’t always repeat itself, it’s important to watch key support levels and become defensive if they are broken.