Here Comes Santa Claus

Robert Maltbie  |

Santa Claus is coming, and at Singular Research, we're looking for a resumption of the bull market. In our latest Market Indicator & Strategy Report that we just issued, we found that, on balance, our indicators are bullish. We also looked at whether 2012 is a value trap, if headline risk will continue to dominate, and asked how much does Europe matter.

Besides the speculation, the report is geared as unemotional and objective as humanly possible in addressing whether should investors be in or out of this market. We think you should be in because we're bullish, and here's why.

As you can see, our indicators net 57 percent to the bullish side, and anything over 50 percent is considered bullish. We feel that the strong corporate buyback activities, combined with attractive valuations and a very supportive Fed, outweigh the weak technicals and the negative momentum. It's really a classic case of misdirection, with the market and European headlines distracting from an improving U.S. economy. On a quarter-to-quarter basis, GDP growth is really starting to reaccelerate, albeit from a low-base.

The crowd has been, on balance, pretty bearish. The AAII Sentiment index shows that bulls are outnumbered by bears a 1.2-to-1 ratio.

The technicals of the market are vastly improved after the 7-percent rally that bailed out November. Sometimes, the market really tells us more in pull backs, and there was an obvious lack of downside follow-through in this case as evidenced by the 10 DMA of new lows not really expanding. It stayed at 200, far below the levels it reached in September and October.

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So although the indices showed corrections, the average issue didn't come down nearly as much. That's reflected in the stats where the upside/downside volume was negative by a 2:1 ratio. But the NYSE advance-decline line diversion was positive by about 1.4. This implies that the sell-off was very narrow, perhaps showing the increasing popularity of ETFs, where investors can short the market with a single trade and click of a button to alter their exposure dramatically.

But definitively, right now we do want to have the technical support us before we get much more aggressive. This means that we need these averages to break-out before we resume the bull-market rally.

Thursday is a big day with the anticipation of what Europe is going to do next and what they agree on in their summit.

But behind the headlines, the liquidity indicators are very positive, and are a key reason why we think we're in a correction instead of a bear market. Net cash flows are strong, our speculation index is neutral, and is not showing a lot of margin buying. Impressively, over $2.6 trillion is earning less than 1 percent. That's how fearful of the market is.

To put that in perspective, that's nearly 20 percent of total market cap of all equities. So that's a lot of fear. We continue to see a large amount of corporate activities buying more of their own stock with the total exceeding $32 in November, as well as mergers and acquisitions, which totaled over $20 billion.

It's pretty simple actually. A CFO looks at his share price and thinks they can borrow money at around 5 percent buy back their stock at a 11 P/E ratio. They can lock that spread in at 8 percent to 9 percent and grow earnings by shrinking the number of shares. Net-net we're bullish. Insider transactions on the buy side are still in the bullish area.

So when you add it all up, we do feel that Santa Claus is coming to town and we see the fundamentals continuing to improve.

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