U.S. equities are up meaningfully as of the time of this writing. Several news articles attribute today’s strength to the retail sales numbers, which were up by 1.1% in February. Interestingly, Dow Jones Newswires reports that the consensus expectation was for a 1.1% increase, thus there was no positive surprise to catalyze the current move. Moreover, the report from the Commerce Department suggests that a primary driver of the increase in February’s sales was higher gasoline prices. To wit, the April RBOB Gasoline futures contract advanced 8.4% last month. This type of spending does not necessarily imply an improvement in the plight of the consumer as energy is more of a staple than it is discretionary.

Separately, I find it unusual for a move of this magnitude to unfold ahead of a Fed Policy Statement given that, as far as I can tell, consensus did not seem to be expecting a material policy change (and did not get one).

The point of this communication though, is not to suggest that the media is clueless as to what drives equity markets. Nor is my objective to imply that the equity market gains recorded in today’s session are unwarranted. While both of these assertions may be true, I am concerned with anticipating market action, rather than ascribing some rationale the day’s happenings after the fact. This leads to my true purpose in penning this piece…

It now looks likely that the S&P 500 will advance into the end of the month. The following chart shows the S&P 500 Index (in the upper pane) as well as daily and weekly Coppock Guides (in the lower two panes). A close today of 1,373.95 or higher is needed to force a bottom in the daily momentum curve. Currently, the S&P 500 is trading almost 20 points above this pivot. As such, it appears highly probable that short-term momentum turns supportive today.

Walter Murphy, Managing Partner at Walter Murphy Global Advisors LLC, has suggested recently that the February 29th through March 6th decline was a Wave 4 affair. Without going into detail on the tenets of Elliott Wave Theory, the implication of this belief is that a rally to new highs is in the cards before any meaningful setback unfolds. Steve Hochberg, Editor of The Elliott Wave Financial Forecast, also acknowledges the possibility that recent S&P weakness may have been a Wave 4 decline. Thus, chart patterns appear to support the conclusion that equities are likely to catch some wind in their sails.

During the brief decline in the early days of this month, short-term sentiment deteriorated to oversold extremes (note how in the lower pane of the chart below, the black Equity Put/Call Ratio curve was driven down to intersect the green 20/2 Bollinger Band that I am using to define oversold). While gains over the last week have alleviated this extreme, many measures of sentiment still remain neutral. In fact, the Put/Call Ratio shown below is on the oversold side of neutral. Accordingly, I interpret short-term sentiment as validating the idea that there is still room for equities to run.

Exhibit 1: Equity Put/Call Ratio

Improving daily momentum is currently expected to persist through March 28th. Weekly momentum will probably top out later this month (see the bottom pane of the first chart). So, in spite of any near-term progress, intermediate-term caution still seems appropriate, as the daily and weekly momentum setup is consistent with the idea of a final surge over the next couple of weeks, and then a multi-month consolidation/correction period.

[My roadmap for 2012 calls for strength through 1Q, followed by an intermediate-term correction that lasts into 2Q, and then a strong showing from summer through year-end—or at least for most of the remainder of the year. Quite obviously, I was wrong to get spooked back in mid-January by what appeared to be a short-term top with the potential to morph into a more sinister decline, however, my broader expectations still appear quite viable.]

More to come. In the meantime, stay nimble and trade safe!

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