After yesterday's action and taking into consideration how the market traded since the beginning of September, I am dumping my bear market assumption. I now think the bull from early 2009 will extend. The bear will hibernate until at least late 2011.
Here is why I see yesterday as a very strong day:
source: Ticker Sense
Notice how risk led the market to new highs. Defensive sectors were laggards.
The spring - summer sell off reached bear market readings. Every time it did that in the past a bear market had begun. This time was different and I am satisfied I did not lose money even if I was wrong. In fact my account is up from the beginning of the rally. Some other bears have become hysterical.
Even if I think the bull will extend, I am not ready to buy. The market has risen about 20% already, the average length of previous bull market rallies. Also, from the point of view of breadth, this move up is visibly weaker than previous ones during the bull market (black segments):
More, the put/call ratio is overbought and is indicating a short term top is very close:
Even more, the employment report is due today and it usually corresponds to market inflection points.
So I think a correction is in the cards beginning next week. I expect it to be about 4-5% in length. The market will then start a move towards 1300 in late November - early December.
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