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Investors Moving to the Sidelines at Exactly the Wrong Time

Fear is causing people to pull out just as the market is gaining better technical footing


Despite seemingly contrasting events, stocks rose in a broad buying spree, which was stimulated by better economic numbers and expectations that there will be no immediate tapering action from the Federal Reserve.

U.S. industrial production in November increased 1.1% from October. It was its fourth straight month of increases. And global manufacturing and business activity increased as well, with the euro zone finishing the year with an unexpected increase of new orders.

Investors’ optimism is apparently grounded in the belief that the Fed will continue with an easy-money policy even if economic numbers show improvement but inflation stays flat. We will learn on Wednesday if that is the case.

At the close, the Dow Jones Industrial Average jumped 129 points to 15,885, the S&P 500 gained 11 points at 1,787, and the Nasdaq popped 29 points to 4,030. The total NYSE volume was 3.2 billion shares and the Nasdaq traded 1.9 billion shares. Advancers exceeded decliners on both major exchanges by over 2-to-1.

DJI Chart
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Chart Key

The Dow rose sharply on solid, but not spectacular, breadth and average volume. The advance moved the index up from major support at 15,700 and its 50-day moving average at 15,671. Its high of the day was close to the trendline marking the top of a bullish flag and its 20-day moving average at 15,956.

Tbond Chart
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The 10-year Treasury bond fell Monday, and the yield advanced slightly. But the yield broke from an inverse head-and-shoulders, or to put that in reverse, bond prices broke down from a head-and-shoulders formation. 

The jump in yields is significant, especially if it can move up through the September high at 2.98%. Note how in September the bond’s highest yield coincided with an advance in stocks.

Conclusion: Monday’s jump in stocks in the face of a possible move by the Fed to taper is bullish, because it could mean that the smart investors have already discounted the decision and are concentrating on the better economic results. They understand that it is those better results that will drive stocks higher and bonds lower in 2014, thus the pending breakout in bond prices that could take yields to as high as 3.31% in 2014.

And there is another reason to be a bull. The American Association of Individual Investors’ (AAII) bullish sentiment number, a contra-indicator, fell from 47.3% on Nov. 28 to 41.3% on Dec. 12. Bearish sentiment declined from 28.3% to 25% during that time. Most interesting is the change in the “neutral” category, which rose from 24.4% to 33.7% during the same period, indicating that the average investor is confused and out of the market. Unfortunately, most small investors missed the big advance this year and now, with a high neutral reading, it appears that fear has again driven them to the sidelines just as the market is gaining better technical footing.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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