Investors may have still been pulling money out of the market last year, three years into the new bull market. The participation in the current leg up from the October low may have been sparse, at least based on trading volume.

But those who have been participating have been having quite ride, with the market rumbling over the rough patches in the road, climbing walls of worry, closing at yet another new rally high yesterday.

In the process the S&P 500 is up another 4.7% in just the first three weeks of the new year, the strongest start to a new year in 25 years, and now up 21% from the October low.

Many of those who disbelieved the rally and missed out are now negative on its chances of continuing due to the rise in bullish investor sentiment.

And there’s no doubt sentiment has reversed from the high level of fear and bearishness at the October low to a significant level of bullishness and confidence.

But has it reached the extreme level of bullishness and lack of fear usually seen at rally tops?

Possibly, but perhaps not, according to the VIX Index, also known as the Fear Index. It shows fear has been declining sharply as the rally got underway. And it has now dropped into the upper line of the warning zone where previous rallies have ended. But it still has a ways to go before reaching the lows more common at rally tops, and it can sometimes stay at those low levels while the rally continues for several more months.

And the market is not terribly overbought on an intermediate-term basis, for instance above 20-week moving averages.

And the S&P has broken out of its triangle formation to the upside, which often indicates its next direction for awhile.

But it’s never that easy.

Investor sentiment is showing low enough levels of fear to result in at least a short-term pullback. And the market is short-term overbought enough, for instance above 50-day moving averages, to result in a pullback from that overbought condition.

And therein will lie the next dilemma for investors and traders.

Remain fully invested in expectation that a short-term pullback would be brief and the intermediate-term rally will resume to the end of the market’s favorable season in April or May? Or take profits temporarily with the plan of getting back in at lower prices and making some of the gains all over again? Or sell short on expectation that the rally is over and a significant correction lies ahead?

It is a decision that should be made in advance. It’s always difficult to make a reasoned decision after a pull back has begun.

To read my weekend newspaper column ‘The U.S. Recovery Is Producing Surprises’ Click here.

Subscribers to Street Smart Report: There is a hotline update from this morning in the subscribers’ area of the Street Smart Report website, as well as an in-depth ‘Signals & Recommendations on the U.S. Market’ update from Wednesday, and an in-depth ‘Global Markets’ report from Tuesday.

Yesterday in the U.S. Market.

A mixed day, on somewhat heavier volume, with just over 0.9 billion shares traded on the NYSE. But the extra volume was undoubtedly all due to the options expirations.

The blue chips of the Dow masked some hesitancy in the rest of the market going into the weekend.

The Dow closed up 96 points, or 0.8%. The S&P 500 closed up 0.1%. The NYSE Composite closed up 0.1%. The Nasdaq closed down 0.1%. The Nasdaq 100 closed down 0.2%. The Russell 2000 closed up 0.3%. The DJ Transportation Avg. closed down 0.4%. The DJ Utilities Avg closed up 0.3%.

Gold closed up $12 an ounce at $1,669.

Oil closed down $2.19 a barrel at $98.20 a barrel.

The U.S. dollar etf UUP closed up 0.1%.

The U.S. Treasury bond etf TLT closed down 1.1%.

Yesterday in European Markets.

After four straight positive days, European markets closed down fractionally yesterday. The London FTSE closed down 0.2%. The German DAX closed down 0.2%. And France’s CAC closed down 0.2%.

Global markets for the week.

Yet another positive week.

Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

Next week’s Economic Reports:

Next week will be a fairly heavy week for potential market-moving economic reports including the Durable Goods Orders, New Home Sales, and another revision to 4th quarter GDP growth. To see the full list click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column ‘The U.S. Recovery Is Producing Surprises’ Click here.

Subscribers to Street Smart Report: There is a hotline update from this morning in the subscribers’ area of the Street Smart Report website, as well as an in-depth ‘Signals & Recommendations on the U.S. Market’ update from Wednesday, and an in-depth ‘Global Markets’ report from Tuesday.

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m.

Non-subscribers: How are you doing? Time for a New Year’s resolution to improve on your investment returns in 2012? We believe we can help, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year, our Seasonal Timing Strategy up 15.8%, in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings. And we are off to a great start this year.

Market, sector, stock, gold, bond, and dollar buy and sell signals, short-sales, long-side and ‘inverse’ etf’s, mutual funds, two portfolios of recommended holdings (one modified buy and hold, and one market-timing). Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Highly regarded and in our 24th year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

This blog appears every Tuesday, Thursday, and Saturday morning!

**** End of Today’s post*****

The big worry among market technicians has been whether the U.S. market would find the 200-day m.a. to be overhead resistance that would end the rally. Failure at the 200-day might mean the summer correction was the first leg down in a new bear market, and the rally off the October low was just a bear market rally, doomed to fail and bring on the next leg down.

But so far anyway the major indexes have broken out above their 200-day m.a.’s and while it isn’t a clear break out, it seems to be increasingly confirmed.

But just as investors begin to gain confidence in the rally, the market has again become short-term overbought above short-term moving averages to a degree that could soon bring a pullback that will bring back the worries.

We’ll be watching our technical indicators for that possibility, and to determine whether we should take some of our profits from the rally.

My apologies but I’m travelling this morning and that’s all I have time for.

To read my weekend newspaper column ‘Brazil Looks Like A Buying Opportunity Again’ Click here.

Subscribers to Street Smart Report: The Mid-Week in-depth ‘Signals and Recommendations’ report on the U.S. market is in the subscribers’ area of the Street Smart Report website from yesterday, and a hotline from last evening.  There is also an in-depth ‘Global Markets’ report from Tuesday. 

Yesterday in the U.S. Market.

The market closed up again.

The Dow closed up 96 points, or 0.8%. The S&P 500 closed up 1.1%. The NYSE Composite closed up 1.3%. The Nasdaq closed up 1.5%. The Nasdaq 100 closed up 1.4%. The Russell 2000 closed up 1.8%. The DJ Transportation Avg. closed up 1.0%. The DJ Utilities Avg closed up 0.1%.

Gold closed up $10 an ounce at $1,659 an ounce.

Oil closed up $0.93 a barrel at $101.52 a barrel.

The U.S. Treasury bond etf TLT closed down 1.2%.

Yesterday in European Markets.

Markets in Europe closed up fractionally mixed yesterday. The London FTSE closed up 0.2%. The German DAX closed up 0.3%. France closed down 0.2%.

Asian Markets Closed up Last Night.

The DJ Asia-Pacific Index closed up 0.9%.

Among individual markets:

Australia closed down 0.1%. China closed up 1.7%. Hong Kong closed up 1.3%. India closed up 1.2%. Indonesia closed up 0.6%. Japan closed up 1.0%. Malaysia closed up 0.1%. New Zealand closed up 0.5%. South Korea closed up 1.2%. Singapore closed up 0.6%. Taiwan closed up 0.2%. Thailand closed up 0.7%.

Premium Content Area. For Street Smart Report subscribers only, used to provide additional info to that provided in newsletter, mid-week reports, and hotlines.

To obtain access click on the ‘Subscribe’ link below which will take you to an information page on subscribing to Street Smart Report.

Markets This Morning.

European markets are up this morning. The London FTSE is up 0.5%. Germany’s DAX is up 0.8%. France’s CAC is up 1.8%

Oil is up $1.00 a barrel at $101.63.

Gold is up $1 an ounce at $1,660 an ounce.

This morning in the U.S. Market:

This is a quite heavy week for potential market-moving economic reports including the Producer Price Index, Consumer Price Index, New Housing Starts, and Existing Home Sales. To see the full list click here, and look at the left side of the page it takes you to.

Tuesday’s report was that the Empire State (NY) Mfg Index jumped to 13.5 in January, better than forecasts of a rise to 11.3, and its highest level in 9 months.

Yesterday it was that inflation remains tame in the U.S., with the Producer Price Index declining 0.1% in December versus the consensus forecast of an increase of 0.1%. And Industrial Output was up 0.4% in December in line with the consensus forecast. And the NAHB Housing Market Index measuring home-builder optimism rose 4 points to 25, much better than forecasts, the 4th monthly increase in a row.

This morning’s reports are that weekly unemployment claims plunged by 50,000 last week to 352,000, the lowest level since April, 2008. The four-week moving average declined to 379,000. And inflation at the consumer level also remains tame, with the Consumer Price Index coming in unchanged in December.

The disappointing report was that new housing starts declined by 4.1% in December, but that comes after an unusual surge of 9.1% in November.

Our Pre-Open Indicators:

Our pre-open indicators are now pointing to the Dow being up 50 points or so in the early going.

To read my weekend newspaper column ‘Brazil Looks Like A Buying Opportunity Again’ Click here.

Subscribers to Street Smart Report: The Mid-Week in-depth ‘Signals and Recommendations’ report on the U.S. market is in the subscribers’ area of the Street Smart Report website from yesterday, and a hotline from last evening. There is also an in-depth ‘Global Markets’ report from Tuesday.

Non-subscribers: Time for a New Year’s resolution to improve on your investment returns in 2012? We believe we can help, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year, our Seasonal Timing Strategy up 15.8%, in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings.

Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, an in-depth 6-page ‘Global Markets’ update every three weeks, and special reports and hotline updates as needed. Sectors, stocks, bonds, gold, short-sales, long-side and inverse etf’s and mutual funds. Highly regarded and in its 25th year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

I’ll be back Saturday morning with the regular Saturday morning post, as usual later than the weekday posts, probably around 11 a.m. eastern time. (This blog appears every Tuesday, Thursday, and Saturday morning!).

**** End of Today’s post*****

It was supposedly a terrible event when Standard & Poor’s downgraded the credit-rating of the U.S. last August, stripping it of its AAA rating for the first time since S&P began providing ratings in 1941. The rating agency dropped the U.S. to AA in August “with negative implications”.

Reuters comments the next day concluded “The action is likely to raise borrowing costs for the U.S. government, companies, and consumers”. Treasury bonds, once seen as the safest security in the world, are now rated lower than bonds issued by countries like Britain, Germany, France, and Canada.”

Didn’t happen. Interest rates, mortgage rates, bond yields have actually fallen since, and U.S. bonds have become the world’s preferred safe haven.

Other financial media conclusions last August included:

“The impact on the stock market will be negative because there will be forced liquidation of U.S. assets.”

Nope. Didn’t happen either. After a sharp one-day decline, the U.S. stock market took off in a one-month rally, then pulled back in November on concerns about the eurozone debt crisis, not its own, then quickly recovered and is now 15% above its level on August 6.

This weekend the financial media reacted similarly to Standard & Poor’s downgrade of nine eurozone countries on Friday, including stripping France of its AAA rating.

Among the weekend comments:

“It is a significant development that will impact France and the Eurozone terribly.”

“Black Friday the 13th for the troubled eurozone”.

“Downgrade Hurts Euro Rescue Fund”.

“Europe on the Brink”.

But so far anyway, the markets in Europe have hardly acknowledged the downgrades as of even passing importance.The London FTSE closed up 0.4% yesterday. The German DAX closed up 1.3%. France, the most important of the countries whose credit rating was down-graded, closed up 0.9%. They are all up again so far this morning.

So what’s going on?

Have the rating agencies lost their credibility and influence on markets since they continued to give U.S. mortgage debt, including sub-prime mortgage debt, coveted AAA ratings in the housing bubble and its aftermath?

Or is it that, having warned of the probable downgrade months in  advance, as was done prior to the U.S. downgrade, that it was already factored into stock and bond prices?

Hedge Funds Were Expected to Cause Trouble In Greek Debt Talks.

European officials have been trying for months to get Greek bond-holders, mostly banks and institutions, to voluntarily accept a loss of 50% on some of their Greek bond holdings as their contribution to the eurozone rescue effort.

What was hoped to be the final meeting to achieve that goal took place last week, and the headlines on Friday that the talks had collapsed sure sounded terrible.

Yet markets hardly reacted. Was it because the failure of the talks was fully expected and was also already in stock and bond prices?

After all, it was revealed last week that large hedge funds have been buying up large holdings in the bonds, taking them off the hands of the original holders, in hopes of making a profit on them if they can influence the final talks.

Their hope is apparently that if they refuse to go along with a voluntary loss and the talks collapse the officials are liable to panic, and perhaps let them get away with a sweeter deal than other bond-holders to save the deal.

Last week Reuters reported York Capital, a $14 billion fund, and Marathon Asset Management, a $10 billion fund, as two they have identified as “among those who collectively may have built up sufficiently large positions to scupper the bailout deal as it is presently proposed.”

Reuters quoted on hedge-fund manager as saying, “I think we’ll hold out.”

So that the collapse of the talks on Friday may have been a surprise to the U.S. media, but would hardly have been a surprise to European institutional investors probably well aware of, and perhaps involved in the bond-dealings.

Meanwhile, I wonder who will panic if the hedge funds have their bluff called and officials move toward letting Greece default on the bonds. That’s a growing possibility given that Greece’s economy is much weaker even than previously thought, while its funding needs are higher. It’s finance minister says Greece’s GDP was probably minus 6% for 2011 rather than the minus 3.8 projection of six months ago.

Markets Have Other Interests – For the Moment Anyway.

The ups and downs in global news reports and in the financial media’s reactions continues.

As I noted last week there was considerable hope in Europe that the eurozone debt crisis was showing signs of improvement, only to have the optimism knocked on the head by Friday’s reports of the breakdown of the Greek talks, and Standard & Poor’s carrying through on its December threat to downgrade the credit ratings a number of eurozone countries.

This morning optimism has returned.

The European Financial Stability Facility(EFSF), which was scheduled to auction 6-month bonds to raise more cash for the bailout fund today, the day after Standard & Poor’s also took away its triple-A rating, received solid demand for the bonds. And the average yield of 0.2664% showed short-term confidence in the EFSF bailout plan.

And before the successful EFSF auction, Spain successfully sold 12-month and 18-month treasuries with yields significantly below its last auction. France, Austria, and Italian auctions also went off at lower yields.

Also from Europe this morning comes the report that inflation remains tame, CPI dropping to an annualized rate of 2.7% in December from a year ago, with forecasts of a further drop to below 2.0% over the next two quarters. That decline in inflation is in spite of the big increase in liquidity that has been pumped into the financial system. The bad news is that it comes from rising unemployment. The good news is that it provides the European Central Bank with more room to cut interest rates to support the economy.

And the widely watched ZEW Index of economic expectations for Germany rose substantially more than forecasts in January, suggesting Germany’s economy may be stabilizing, although economists on average are still expecting a mild recession.

And last night from Asia came reports that China’s economy grew at 8.9% in the fourth quarter, better than analyst forecasts. It is a slowdown from the average growth over the last 30 years of a red-hot 10% annually, but has China still a powerhouse of support for global economies.

And in the U.S., today’s economic report was that the Fed’s Empire State Mfg Index jumped to 13.5 in January, better than forecasts of a rise to 11.3, and its highest level in 9 months.

And so Standard & Poor’s downgrade of eurozone countries on Friday seems to so far be a non-event.

BUT watch investor sentiment, which is climbing into warning levels of bullishness.

To read my weekend newspaper column ‘Brazil Looks Like A Buying Opportunity Again’ Click here.

Subscribers to Street Smart Report: We will have an in-depth ‘Global Markets’ report on the website for you later today, and the regular Mid-Week in-depth ‘Signals and Recommendations’ report on the U.S. market tomorrow. Meanwhile, there is an important hotline from last Wednesday in the subscribers’ area of the Street Smart Report website.

Yesterday in European Markets.

Major markets in Europe ignored the downgrades of eurozone countries after the markets closed on Friday, closing up yesterday. The London FTSE closed up 0.4%. The German DAX closed up 1.3%. France, the most important of the countries whose credit rating was down-graded, closed up 0.9%.

Asian Markets Were Down Sunday Night But Soared Last Night.

The DJ Asia-Pacific Index closed down 0.9% Sunday night apparently on nervousness regarding Standard & Poor’s downgrade of numerous eurozone country debt ratings Friday.

But, when major European markets were unconcerned when they opened Monday morning, closing up on the day, and China reported stronger economic growth than economists expected, Asian markets surged back up last night, China leading the way, closing up a big 4.2%.

The DJ Asia-Pacific Index closed up 1.8% last night.

Among individual markets last night:

Australia closed up 1.6%. China closed up 4.2%. Hong Kong closed up 3.2%. India closed up 1.7%. Indonesia closed up 1.2%. Japan closed up 1.1%. Malaysia closed up 0.7%. New Zealand closed up 0.8%. South Korea closed up 1.8%. Singapore closed up 2.2%. Taiwan closed up 1.7%. Thailand closed up 1.9%.

Premium Content Area. For Street Smart Report subscribers only, used to provide additional info to that provided in newsletter, mid-week reports, and hotlines.

To obtain access click on the ‘Subscribe’ link below which will take you to an information page on subscribing to Street Smart Report.

Markets This Morning.

European markets are off earlier highs but still up this morning. The London FTSE is up 0.6%. Germany’s DAX is up 1.5%. France’s CAC is up 1.0%

Oil is up $1.53 a barrel at $100.23.

Gold is surging up $28 an ounce at $1,659 an ounce.

This morning in the U.S. Market:

This is a quite heavy week for potential market-moving economic reports including the Producer Price Index, Consumer Price Index, New Housing Starts, and Existing Home Sales. To see the full list click here, and look at the left side of the page it takes you to.

With U.S. markets closed yesterday there were no reports.

This morning’s only report was that the Empire State (NY) Mfg Index jumped to 13.5 in January, better than forecasts of a rise to 11.3, and its highest level in 9 months.

The surging markets in Asia last night, and Europe this morning, are leading the U.S. market pre-open indicators higher this morning.

Our Pre-Open Indicators:

Our pre-open indicators are off earlier highs but still pointing to the Dow being up 100 points or so in the early going.

To read my weekend newspaper column ‘Brazil Looks Like A Buying Opportunity Again’ Click here.

Subscribers to Street Smart Report: We will have an in-depth ‘Global Markets’ report on the website for you later today, and the regular Mid-Week in-depth ‘Signals and Recommendations’ report on the U.S. market tomorrow. Meanwhile, there is an important hotline from last Wednesday in the subscribers’ area of the Street Smart Report website.

Non-subscribers: Time for a New Year’s resolution to improve on your investment returns in 2012? We believe we can help, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year, our Seasonal Timing Strategy up 15.8%, in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings.

Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Sectors, stocks, bonds, gold, short-sales, long-side and inverse etf’s and mutual funds. Highly regarded and in its 23nd year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

I’ll be back Thursday morning with the regular Thursday morning post, around 9":25 a.m. (This blog appears every Tuesday, Thursday, and Saturday morning!).

**** End of Today’s post*****