The bullish trend foundation of North American equities should help deliver positive returns through the rest of the year. There are pockets of sector weakness, but strength in some important areas. The Bull/Bear Ratio helps guide us...
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The Stock Trends approach to measuring investor sentiment is simple. There is no sample survey of individual investors. No tabling of investment guru opinions. There is no complex model that attempts to either conflate or conjure market sentiment from leading or contrarian indicators. Neither is there a technical metering of absolute price levels, where investor sentiment is derived from subjective throttling of enthusiasm and fear based on the markers benchmark market indexes hit (Dow hits 13,000!). And certainly, there is no attempt to assign investors’ rational responses to a valuation metric that would declare equities are either ‘expensive’ or ‘cheap’. Instead, Stock Trends applies a pluralistic method: share price trends in individual stocks are categorized and then aggregated – a democratic vote of every stock trading on the exchange. This thumbs-up/thumbs-down enumeration gives the same voting power to both small cap stocks and market behemoths like the Dow Jones Industrial components. Although more investors have vested interests in liquid large cap stocks, the share price movement of every stock is a function of supply (willing sellers) and demand (willing buyers) – how those competing factions command each market forms virtually a binary result when measuring price changes over time.
At the moment of transaction both buyer and seller meet on agreeable terms: it is only later that either of their valuations or sentiment is validated. How the aggregate distributions of price trends change indicates the shifting balance of opinion between market participants.
Currently, the bullish investment sentiment is prevailing on the Big Board. Bullish trending stocks on the NYSE have elevated to about 65% of the total. The NYSE Bull/Bear Ratio – the ratio of the number of stocks in a bullish Stock Trends category to the number of stocks in a bearish Stock Trends category – is now 4.5. This tells us that the rising tide has lifted many boats and that investors are feeling more comfortable about equities, despite the worries that afflict the market. Sometimes the ‘sky is falling’ bearish commentators get drowned out by the prevailing market trend. This is one of those times.
There are problems in areas of the North American equity market. The weakness of materials and energy stocks is apparent especially on the Toronto Stock Exchange where the Bull/Bear Ratio has a bullish reading - but a very restrained one. Other groups dragging on the market include semiconductor stocks, commodity-like creatures as well. The Philadelphia Semiconductor index (SOX) has retreated and is in a Weak Bullish trend. This is not a reflection on the broader tech sector, which is outperforming the market by 5% in the past three months. Financial stocks are another important story of strength, as well as consumer cyclical stocks.
The market might shudder at times and send stocks in retreat, but the current trend foundation remains positive. Now is not the time to exit equities.
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