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Conflicting Market Signals?

Wall Street's benchmark indexes DOW and S&P 500 closed last week at record highs. Not far behind is NASDAQ which is approaching 4000, a level last seen in September 2000, just at the collapse of the market when the dot-com bubble burst.

Now the current record rally reflects a momentum driven market which is fuelled by investors' expectations that corporate profits will remain favourable, that the Fed will continue its easy money QEs and on signs that individual investors are getting off the sidelines and back into the game.

At the recent confirmation hearing, the Fed's chair nominee Janet Yellen assured market participants that the Fed's accumulative stimulus would continue as far as the eye can see. This is just what the market wanted to hear as it responded with increased momentum to the upside.

But check this XLP: XLY chart and note that this index is firing warning shots across the bow of the surging market.

This index is a contrarian indicator. When it declines with the green Moving Average line above the red line the market is in gear to rally. But when this index rises with its green MA line below the red, the market is vulnerable to a nosedive.

After projecting a steady rally from last May to the beginning of November these MA lines are now starting a bearish configuration with the green line below the red. If this configuration continues, it will only be a short while before the market reacts with a selloff.

By contrast, the junk bond canary [JNK] in the market's coal mine shows an exceedingly bullish MA lines configuration [green line below the red] which suggests that this rally still has legs. That its MACD momentum index and RSI strength indicator are both deep in their respective bullish territories is also a sign that the bull is alive and well.

But even here are a couple of caution signals to be aware of. Since the middle of last October the JNK consolidated and formed a plateau on which the market can keel over and slide to lower lows, or conversely find traction and rally to higher highs. Also, the space between the green and red MA lines has the widened to the point where they suggest a market bubble in the making, and we all know what that implies.

Check this Troika and note that its bull components [SPX] and [SPXL] have consolidated and are now on a renewed surge to the upside. While the MA lines configurations of these two indexes are extremely bullish [green lines below the reds] they are also in the process of blowing bubbles, and that could stop this rally cold.

But the bear component of this Troika [SPXS] is as bullish for the market as it can get [green MA line above the red.] This assures that when the market does take a shakeout to the downside, it will only be to find renewed traction to the upside again.

Note that the MACD momentum index and RSI strength indicator of this bear are totally exhausted at the bottom of their respective negative territories. So all in all, this Troika is exceedingly bullish and so is the market to the point where it will have to pull back and catch its breadth before reaching for higher highs again.

This NASDAQ 100 index [NDX] has also consolidated while its MA lines configuration remained strongly bullish [green line below the red.] This is a sign that the technology sectors of the market are gaining strength and in due time will probably lead the market to higher highs.

By contrast the commodity sectors of the market [DBC] are still struggling. While this index is working its way off the bottom, there is no way the commodity market can kick into a sustained advance until such time that the MA lines configuration of this index turn bullish again [green line below the red.]

It is then that the MACD momentum index along with the RSI strength indicator of this index will move up in their respective bullish territories again and supply the support needed for commodities to rally anew.

Adding to the bullish outlook of the market are the small caps [SML.] Note that while this index was consolidating, its MA lines configuration remained strongly bullish [green line below the red] which allowed the small caps to break to the upside and reclaim the leadership in this market.

The exceedingly bullish MA lines configuration of this transportation index [IYT] reflects the underlying and growing strength of the North American economy. But its MACD momentum index and RSI strength indicator are in need of some retrenchment. This could indicate that the economy may have to take a breather before expanding further.

[GOLD] may have a surprise in store for investors. While this index is lifting off the bottom, its MA lines configuration is just about to turn bullish again. When the green line slips below the red the yellow metal will have hit bottom, and getting ready to rally again.

Crude oil [WTIC] remains a basket case. Although this index is trying to get out of the hole at the bottom of a deep pit, for as long as its MA lines configuration stays strongly bearish [green line above the red] oil won't have a chance to rally. Also note that the MACD momentum index and RSI strength indicator are way down in their respective bearish territories, which adds to the bearish weight of oil.

When considering any of these favoured ETFs keep in mind that the bull and long ETFs continue to have the upper hand for now. Still, with the market in need and poised for a pullback, be prepared to take profits, stand aside and wait for the all-clear signals to the upside again.

Bear and short ETFs are not worth the effort unless the impending pullback develops into a sustained decline.

Leveraged Bull ETFs:

Russell 2000, 3x (NYSEARCA:URTY), Small Caps 3x (NYSEARCA:TNA), China 3x (NYSEARCA:YINN), NASDAQ 3x (NASDAQ:TQQQ), Semis 3x (NYSEARCA:SOXL), Mid Caps 400, 3x (NYSEARCA:UMDD), Health Care 3x (NYSEARCA:CURE), Financials 3x (NYSEARCA:FAS),

S&P 500, 3x (NYSEARCA:UPRO), S&P500, 3x (NYSEARCA:SPXL), Russell 2000, 2x (NYSEARCA:UWM), NASDAQ 100, 2x (NYSEARCA:QLD),

Energy 3x (NYSEARCA:ERX), Technology 3x (NYSEARCA:TECL), Mid Caps 400, 2x (NYSEARCA:MVV), Financials 2x (NYSEARCA:UYG),

S&P 500, 2x (NYSEARCA:SSO), Japan 2x (NYSEARCA:EZJ), DOW 30, 3x (NYSEARCA:UDOW), Basic Materials 2x (NYSEARCA:UYM),

Technology 2x (NYSEARCA:ROM), Alerian 2x (NYSEARCA:MLPL), DOW 30, 2x (NYSEARCA:DDM), Emerging Markets 3x (NYSEARCA:EDC),

Real Estate 3x (NYSEARCA:DRN), Real Estate 2x (NYSEARCA:URE),

Non-Leveraged Long ETFs:

Solar (NYSEARCA:TAN), China (NYSE:CQQQ), Clean Energy (NYSE:PBW), Social (NASDAQ:SOCL), Internet (NASDAQ:PNQI),

Gaming (NYSEARCA:BJK), Biotech (NYSE:PBE), Energy (NASDAQ:PSCE), Health Care (NASDAQ:PSCH), Aerospace (BATS:ITA),

Biotech (NYSEARCA:BBH), Spin-Offs (NYSE:CSD), Industrials (NASDAQ:PRN), Internet (PRN), Internet (NYSEARCA:FDN),

Leisure (NYSE:PEJ), Mid Caps (NYSEARCA:VOT), Vanguard (NYSEARCA:VXF), Russell 3000 (IWZ), S&P 500 (NYSE:RPG),

NASDAQ (NASDAQ:QQEW), Mid Caps (NYSEARCA:IWP), Aerospace (NYSE:PPA), Info Tech (NASDAQ:PSCT), Small Caps (NYSE:RZV)

Exploration (NYSEARCA:XOP), Small Caps (NYSE:RZG), Small Cap Techs (NASDAQ:DWAS), Small Caps (NYSEARCA:RWJ), Transports (NYSEARCA:XTN), Retail (NYSEARCA:XRT), Semis (NYSEARCA:XSD), Golden Dragon (NASDAQ:PGJ), Semis (XSD).

Leveraged Bear ETFs:

Nat Gas 2x (NYSEARCA:KOLD), Oil 2x (NYSEARCA:SCO), Real Estate 2x (NYSEARCA:SRS), Euro 2x (NYSEARCA:EUO), China 2x (FXP),

Oil (NYSEARCA:DTO), DOW 30, 2x (NYSE:DXD), Emerging Markets 2x (NYSE:EEV), Oil & Gas 2x (NYSEARCA:DUG),

DOW 30, 3x (NYSEARCA:SDOW), S&P 500, 2x (NYSEARCA:SDS), Financials 2x (NYSEARCA:SKF), NASDAQ 2x (QID), Technology 3x (NYSEARCA:TECS), Russell 2000, 2x (NYSEARCA:TWM), S&P 500, 3x (NYSEARCA:SPXS), Energy 3x (NYSEARCA:ERY),

Financials 3x (NYSEARCA:FAZ), Semis 3x (NYSEARCA:SOXS), NASDAQ 3x (NASDAQ:SQQQ), Small Caps 3x (NYSEARCA:TZA)

Non-Leveraged Short ETFs:

Gold (NYSEARCA:DGZ), DOW 30 (NYSE:DOG), S&P 500 (NYSEARCA:SH), EAFE (NYSEARCA:EFZ), Mid Caps (NYSE:MYY),

NASDAQ (NYSEARCA:PSQ), Russell 2000 (NYSEARCA:RWM), Oil (DNAO), EAFE (NYSEARCA:EFU), Mid Caps (MYY),

Emerging Markets (NYSEARCA:EUM), Equity Bear (NYSEARCA:HDGE), Alerian (NYSEARCA:MLPS), Financials (SEF),

Real Estate (NYSEARCA:REK).

GOOD LUCK!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.