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March 2010: Market Review

March- Stock Market Review:

The major averages ended higher in the first quarter of 2010 and confirmed its latest rally on the March 1, 2010 follow-through day (FTD). It is very healthy to see the major averages continue to advance even after the tremendous gains experienced over the past 12 months as the global economy continues to recover from the worst simultaneous bear market and economic recession since WWII. After that tremendous run, the major averages spent the first month two months of 2010 consolidating before again rising to fresh recovery highs in March.
Bullish Case:
The short, intermediate, and long term outlook for the major averages remains bullish for US equities. Last month, each of the major averages jumped above their multi-year downward trendlines as a slew of high ranked stocks triggered fresh buy signals when they broke out of sound bases. In addition, this occurred after a short-term correction sent the benchmark S&P 500 Index down -9% from its early January high. It is very important to step back and put the recent correction into proper context before passing judgment. As of this writing, the deepest the market has pulled back since the March 2009 bottom was -9% from its post recovery high. This is a bullish sign for this new bull market since every time the market has pulled back the bulls have promptly showed up and quelled the bearish pressure and defended support. Second, history shows us that most bull markets last between 18-36 months before they fail. Therefore, the fact that we are only beginning our 13th month bodes well for this somewhat young bull market. Third, nearly every government across the globe stepped up and unanimously infused an unprecedented amount of capital into the global economy. This unified action saved the global economy from entering a deeper recession and laid the foundation for this robust rally. Fourth, the price and volume action of the major averages and leading stocks remains very healthy evidenced by the fact that every correction in this strong bull market has been very shallow.
Bearish Case:
Sovereign debt woes continue to be the bane of this rally. Greece, managed to escape default when the EU tapped the IMF for emergency funds in late March. In addition, Portugal and Iceland experienced downgrades due to their monstrous debt levels which rattled investors. All this helped the US dollar enjoy one of its strongest quarterly gains against the euro in over a year. Since November, the greenback has rallied smartly and jumped above its 50-day moving average (DMA) and 200 DMA lines. As expected, the stronger dollar sent US stocks and a slew of commodities (i.e. dollar denominated assets) lower as investors continue to debate our economic future. The bears believe that the effects of the massive worldwide stimulus packages from 2008-2009 are beginning to wane and the future of the global economic recovery may not be as robust as initially expected. The bears also claim that technically this rally is done and overdue for a serious intermediate-term correction. Since the March ’09 lows, the major averages have retraced (rallied back for) approximately +50% of their 2007-2009 bear market decline, which is a fairly typical bounce before a new down leg ensues. Only time will tell exactly how this plays out.
Market Action:  Price & Volume B+
As we all should know, the major averages topped out in October 2007 and then proceeded to precipitously plunge until they put in a near-term bottom in early March 2009. Since then, the market snapped back and enjoyed hefty gains which helped send the major averages to one of their strongest 12-month rallies in history. The small cap Russell 2000 Index was the standout winner, surging a whopping +103%. The tech-heavy Nasdaq Composite is a close second, having vaulted +92%, before reaching its interim high of 2,432.25 on March 25, 2010. The benchmark S&P 500 Index raced +77% higher before hitting its near term high of 1,180.69 on March 25, 2010, and the Dow Jones Industrial Average soared+69% before printing its near-term high of 10,955 on March 25, 2010.   This data indicates that Thursday, March 25, 2010 appeared to be a very important day for the market because that is the day that most of the popular averages printed their near-term highs.
The fact that there have only been a few distribution days (and not very damaging ones, technically) since the follow-though-day (FTD) bodes well for the current rally. It is also a welcome sign to see the market continue to improve as investors digest the latest round of stronger than expected economic and earnings data. Remember that now that a new rally has been confirmed, the window is open to proactively be buying high quality breakouts meeting the investment system guidelines. Trade accordingly. Never argue with the tape, and always keep your losses small
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