Four Reasons to Expect a Rally!

by Sy Harding, StreetSmartReport.com | May 27, 2010

The Dow closed at a new correction low on Wednesday, heightening investor concerns.

However, there are four reasons to expect a rally from here.

Oversold conditions: In the correction of the last four weeks global markets, including the major indexes in the U.S., have become oversold beneath key short-term moving averages.

Investor sentiment: The VIX Index (aka the Fear Index) was very low in late April as the correction began, indicating a high level of complacency, as is usual at market tops. As is also usual, fear has been rising as the correction continued and the VIX is now at a high level of fear, as is frequently seen when rallies begin.

Another method measuring investor sentiment, the weekly poll of its members by the American Association of Individual Investors (AAII), reached its warning zone by rising to 48.5% bullish two weeks before the April top. It has reversed as the correction has been underway, and is now at 50.9% bearish, its highest level of bearishness and fear so far this year.

Favorable short-term seasonality: The market’s ‘monthly strength period’ is due to begin today or tomorrow and to run through next week. The monthly strength period consists of those days just before and after the end of each month, when extra chunks of money flow automatically into the market. That extra fuel comes from investors following a strategy of dollar-cost averaging into the market on a monthly basis, from monthly interest and dividend payments marked for automatic re-investment, from monthly contributions to 401K plans, and so on. Mark Hulbert says it is the most consistently positive short-term market pattern he has ever tracked.

Support has held: The market seems to have successfully tested the potential support at the closing low of its January/February correction.

At least a short-term rally is likely from the combination of those conditions.

However, as I asked in my post a few days ago, “Buy the dip or sell into any rally?”

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear—How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way!—Proven Seasonal Strategies Double Market's Performance!

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