Saturday, January 21, 10:30 a.m.

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.

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%.

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%.

Yet another positive week.

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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.

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