This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Restrained Rally Slowly Emerging

To anticipate trading over shorter periods, I rely on both the market's internal quantitative data as well as other technical signals. These have been modestly encouraging, with only a few exceptions -- including weak market breadth, which Helene Meisler has examined in detail.

This buying juncture is not ideal. Although it hasn't fully gelled yet, I am becoming increasingly more comfortable shifting toward a bullish posture, for however brief a time period that may be.

I would become even more aggressive if not for several fundamental factors that counterbalance these quantitative improvements. These include more restrictive monetary policy and increasing fiscal budgetary pressures, which suggests a rising likelihood of either higher taxes or less deficit spending, or both.

Despite this not-quite-perfect floor, most of the elements are slowly coming together to support at least a modest year-end rally. My analysis suggests that traders and index buyers can get long over the next few weeks, with a projected top in mid-December.

What's the basis for this? My key positive factors include:

  • Nasdaq short interest: This hit a record high last week. Historically, extremes in shorting -- most especially when done by odd-lotters -- occur fairly close to intermediate bottoms.
  • NYSE thrust sessions: A thrust session occurs when the New York Stock Exchange's decline-to-advance ratio is 2-to-1 or greater, and simultaneously has a similar ratio of up/down volume. Present thrust session levels are similar to those previously reached in May of this year, June 2004, and March 2003 -- all high-fear junctures that were near intermediate-term bottoms.
  • Nasdaq 52-week high-lows: As the chart below shows, the cumulative high-low index has reached levels that in the past have been good buying junctures. Do note, however, that this most recent peak is much less severe than prior periods that formed better bottoms. That implies a more modest bounce off of the lows.
  • Going to Extremes
    The spike in Nasdaq 52-week lows has reached levels that in the past have been good buying junctures.
    Click here for larger image.
    Source: Redwood Technimentals

  • Moderating bullishness: One measure of bullishness I like is the American Association of Individual Investor's sentiment index . It was 51.4% a month ago, sliding to 43% and then 32% this week. Ideally, I like to see this in the teens or even low 20s, but it is still apparent that some of the excesses have been rung out. The moderate number is why I can imagine the bottoming process taking a bit longer, and also why I am not looking for a monster rally.
  • 2 of 3

    Select the service that is right for you!

    COMPARE ALL SERVICES
    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!
    DOW 16,632.37 +17.56 0.11%
    S&P 500 1,943.00 +1.72 0.09%
    NASDAQ 4,417.8640 -1.6140 -0.04%

    Brokerage Partners

    Rates from Bankrate.com

    • Mortgage
    • Credit Cards
    • Auto

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs