We seem to be witnessing a battle between two sets of indicators at the moment, each with its own opinion on which way the market is headed.

On the one hand, as we have been expecting, our Long-Term Master Key has dropped below -80%, which is a “sell” signal. On the other hand, we have a lot of technical and economic evidence that argues against a sharp fall in the market.

In your last update, we explained why a so-called “sell” signal in the Long-Term Master Key would not send us into a panic mode. Before you start dumping good stocks, let's review the situation.

In the first place, the market has already retreated significantly from its highs last fall, perhaps in anticipation of this week's “sell” signal. So prices today are quite reasonable.

We should also remind you that there's nothing magical about the -80% figure. It's just a rule of thumb based on historical data. But we can't really say that there's much difference between -80% and -79%.

More importantly, we should point out that the Master Key has a certain built-in bias due to the fact that it relies on the price of oil as measured in U.S. dollars. This bias towards U.S. currency might not be as appropriate anymore when considering global oil prices. For instance, if we measure oil prices in terms of the Euro or other world currencies, they are nowhere near the -80% threshold.Read more...

Last week stocks retreated another 2%, when the inflation figures came out a little higher than expected, raising fears that the Fed won’t stop raising interest rates. But don’t panic. We don’t think the market has peaked.

Two weeks ago, almost all the averages made new highs – transportation, financials, unweighted averages, everything. And while that sounds “peaky” to the untrained, we cannot recall an instance where such a convergence has coincided with a major market peak. A setback perhaps is in order – 6% or 7% -- but not likely a peak.

This means that while stocks over the next week or two could fall another few percent, there should be further gains before long. If we had to suggest a likely scenario (and you must remember that the most likely scenarios seldom unfold exactly as expected), we could easily envision the Dow making an all-time high in the near future – somewhere in the neighborhood of 12,000.

An all-time high in the Dow could very well be followed by a major correction, along the lines of 15% to 20%. But that’s down the road. For the short term the technical indicators are simply too strong to be consistent with a major decline. Sure there could be a bit more weakness but over the next few months the risk reward ratio is dramatically in favor of the bulls.Read more...