Follow The Leader-less Market

In this election year, we hear almost daily about leadership skills and the ability to inspire confidence. That’s fine for political junkies, but it makes us stock guys wonder: Where are the leaders in this market? Which stocks are going to take their followers to the Promised Land? Citibank, Pfizer, IBM, Intel, and 3M have all failed to rise to the occasion.

Who will step up?

I could become Bullish much more easily if I could find a sector – besides Energy or Commodities – demonstrating some sort of leadership. The guidance by Oil and Basic Materials are “counterproductive,” as their leadership sucks the air out of the room, choking off the rest of the market. Bulls can ill afford a chief of this kind.

With the Generals AWOL, I have been looking somewhat askance at my favored indicators. They are approaching levels that typically get me all hot and bothered – yet I’m hesitant to make a call for an impending reversal. Why? The soldiers cannot launch a counter-offensive without someone to call out the battle plan. So while we await the appearance of white smoke, here’s what I am focused on:

· Arms Index: The 10 day moving average has passed 1.7, strongly suggesting that a reversal is imminent. The caveat is that this normally reliable indicator became very much less so during the heart of the bear market. Since the most recent sell off is more akin to a pullback than it is to the post bubble-popping days, I’ll give this 75% of the weight I usually do and say its strongly bullish.

· Consensus waiting for Rally: There seems to be a uniform belief that a rally will occur – but not until after the summer or the Democratic convention. That’s exactly the sort of groupthink that the market seems to delight in disproving. If a reversal is to happen, I’d expect it to take place sooner than the later as the crowd expects;

· Additional Technical Indicators: Several other factors are starting to line up Bullish: The Put/Call Ratio’s 15 day moving average is at point that historically has led to a bounce; The percentage of NASDAQ issues on a daily MACD buy is now down to 25% – that typically suggests we are merely 3 to 5% away from a bottom; The Nasdaq 52 week Net New Highs (see nearby chart) also is at bullish levels.

It is inevitable we see a bounce (eventually); Without a leader planning the battle, however, it seems destined to failure. That fate can be avoided only if real leadership emerges.

Until the void gets filled, we should expect to see an enthusiastic – but doomed – bounce.

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