I was in vacations and now back to posting. I’ve got a great comment from Don, which is worth a discussion:

theroxylandr,

Please don’t take this personally but I think you are pissing into the wind. Bull mkts exist on a wall of worry and as long as folks like you (and many other blogs, etc.) remain bearish, I will remain bullish.

Don

In fact this is exactly how the market works and I need to learn a lot before I can get this concept easily. The economy always has a bunch of problems, always. And it always has a lot of bright spots. The emotions make a person bull or bear and affect his decisions.

I’m a bear, but in this post I will try to present the way the market can go up. Let stick with charts, this one is S&P bullish percent index with S&P500 plotted in gold color:

BPSPX oct 07

As you can see the $BPSPX was in the trading range for the last 3 years, then something interesting started. It peaked back in February at 80.2 and is in decline at the same time as the stock market is posting new highs. It means that many stocks reached their peaks and are not so bullish even when the index is climbing.

Now very similar chart but with Advance/Decline line vs. S&P:

NYAD Oct 07

It peaked at 66.7 in very early June and is in decline since then, even though the market is moving up.

So there is a clear deterioration of the market internals. Why is that bullish? Because it was bullish last time it happened. The idea is that every bull stock market must end with some kind of climax. It could be a bubble or just a mania, but it needs every Joe the Dishwasher and his dog to invest into stocks on margin. Let see a historic chart:

NYAD 1998

The last time the A/D line and the market peaked together it was in April 1998. The $NYAD gave the market a very nice 10-days advance warning in mid-August before the market crashed. Then the recovery started in October ’98 and The Internet Bubble took off. The A/D line never recovered until late 2000.

What does it mean? The majority of stocks including financials, transports, utilities and many others were in decline all the way from April ’98. But that did not tank the market. The minority of Internet stocks posted such a strong gains that they pushed the indices into very powerful rally.

Can it happen now? Of course it can. The Monkeyboy just said “this economy is a vibrant and strong economy“. I don’t know, maybe J6P will jump in and invest more into stocks on margin (he has no cash).

The Madman Cramer created his horses of Apocalypse: Amazon, Google, Apple and Research in Motion. He just declared that Google will go up to $701. Four stocks will not make the mania and bubble, Cramer needs to work harder. The idea behind Internet Bubble was to buy anything that is dot-com. So far I see little connection between Apple and Amazon except that they both starts on “A”. It works for China, in China the stocks that have the lucky “8” number in the ticker are valued much higher, but our J6P lost so much during Internet Bubble that he is not so simple anymore. He is smart enough to watch Cramer, he is.

The stock market is the interesting thing, when it creates a bubble it can support consumption with the “wealth effect” and thus support the bubble. The ’98 and now are such an equilibrium points. Last time the Bubble was successfully blown. This time we have very little time left. If the future is an another bubble, it better has to start now