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Bulls vs. Bears

June 6, 2011 – 5:01 pm

Five weeks in a row on the down side for the market has shaken a lot of bulls out of stocks. Some are starting to talk about a double dip in stock prices. Some are saying that there is going to be a double dip recession for the economy as well.

It is hard to see a double dip in the economy with the Fed keeping such a loose rein on money supply. The problem with that argument is that QE2 is expiring on June 30 which is adding to the uncertainty. Throw in weak economic numbers, especially the jobs report on Friday, and there is justification for the fear.

The Hulbert Stock Newsletter Sentiment Index which measures the amount of bullishness and bearishness in the market a few weeks ago was at a high bullish sentiment with a reading of 67.2%. Last week it was still up at 46.0% but after last week the reading fell to 24.8%. Bullishness has collapsed. As a contrarian, reading this is positive for the market. The thinking is that those who wanted out of the market are out. Thus bearishness is very high and when that happens the market finds a bottom.

However, are we there yet? Last summer starting in May just like this year the market bounced up and down with the deepest pullback at the beginning of July. The market started to came back starting in late August. If you remember correctly we had hit a soft patch in our economy and the various weak European countries were the blame for last year’s softness. It sounds like the same reasons for this year.

It certainly feels the same this time around as it did last year. This year is actually less volatile so far. We need some good news coming out of economic statistics and I do not see it happening this week. Could this be
more than a soft patch? It is possible but there is no clear reason to think so.

Watch the consumers. We need them to spend. Will they, or can they?

Good Trading
Steve Peasley

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