Chris Ciovacco's  Instablog

Every time a major stock index approaches a new high, invariably we can find calls that "a major top has already been made". We have seen several such articles in recent weeks. While these incessant calls for a major top may be 100% accurate at the present time, a review of historical major tops gives little support for such a claim. A short-term top within a major bull market can occur at anytime, but major tops do not occur very often.

Fundamentals Are Improving: We also have to consider improving fundamentals when constructing a case for a major top in stocks or the lack thereof. Thursday’s unemployment report came in better than expected, but more importantly the four-week moving average of jobless claims dropped to its lowest level in almost a year. Third quarter earnings that came in above expectations, beat those below expectations by a ratio of 6-to-1. Admittedly, earnings estimates in Q3 were conservative, and employment will remain weak for a time, but recent data does suggest some economic improvement.

Below we'll cover a potentially positive development in market breadth. Wednesday morning's financial headlines may help breadth continue to improve in a bullish fashion:

Investors Are Wise To Remain Flexible: The bearish spin on unemployment is obvious. The bullish spin is weak employment means low interest rates which is good for asset prices. Another possible spin by the bulls is "sell the rumor (weak employment) and buy the news (Friday's report)". Ultimately, it matters how the market (in the collective minds of participants) chooses to spin it, not how we at CCM choose to spin it. Nor does it matter how any one individual, one columnist, one market guru, one money manager, one firm, or one talking head chooses to spin it. The market sets asset prices, not individuals or gurus. You'll hear a lot of "the highest unemployment rate in 26 years" in the next 72 hours. Keep in mind, 26 years ago was 1983, another period of negative investor sentiment. Sentiment is a contrary indicator – markets do well when people are pessimistic. Stock market performance from 1983 to 2000 is shown below to stress the importance of keeping an open mind as you read all the gloom and doom articles in the coming days. An open mind means open to bullish and bearish outcomes, despite negative sentiment. An open mind, means remaining flexible enough to react to bullish or bearish conditions as new information comes to light, both via the news cycle and the market's reaction to the news.

In the last two weeks, in Reflation Supported By Stocks, Commodities, and Oil, and Gold, Recessions, Bonds, and 1987, we hypothesized that recent bullish moves in gold, oil, and the CRB Index were evidence of successful "reflation" of asset prices via monetary and fiscal policy. This week, we can add copper and emerging markets to the bullish evidence list. From a fundamental perspective, the desire to hold copper is based on economic need (you want to make a product), and inflation protection (you want to own hard assets rather than paper currencies). 

Last week in Gold, Recessions, Bonds, and 1987, we stated that:

As investors try to make sense out the of relentless bullish moves in asset prices, we will touch on a few timely topics: