Montreal, Canada

According to Richard Russell's Dow Theory Letters the primary trend of the stock market is now bullish following recent confirmation this week of several key barometers.

Markets continue to climb a "wall of worry" this month with more indexes breaking into new highs for the year after recouping January losses. Earlier this month the Russell 2000 Index, S&P 400 Mid-Cap Index and the S&P 600 Index of small-caps hit new 2010 highs.

Stocks fell about 8% from mid-January to February 8th. That marks another in a series of modest pullbacks since stocks hit a low on March 9, 2009. Equities have not declined more than 9% from their post-March 9 lows – unusual market action considering the suspicious level of low participation or weak trading volume.

In the United States, the broader market and other important averages hit new highs for the calendar year this week, including the Dow Jones Industrials, the S&P 500 Index and the Dow Jones Transportation Average.

According to Dow Theory, if both the Dow Jones Industrials AND the Dow Jones Transportation Average hit new highs at the same time then that's considered bullish price action. Richard Russell, who's edited Dow Theory Letters since 1958, remains bearish on U.S. stocks because he claims they're overvalued relative to earnings, dividends etc. I agree.

International stocks are also breaking out this week.

The MSCI World Index of major industrialized bourses is just 1% below its high for the year. But when measured in local currency terms, the MSCI World Index is now at a high in 2010. Local currency returns are a more accurate gauge of generic global stock market performance because currency factors don't distort returns.

In Europe, several markets are just a few points away from their best levels, including the German DAX and Paris CAC-40. In London, the FTSE-100 Index, or Footsie, hit a 2010 high a few days ago.

The emerging markets, however, have lagged major markets since January and remain several percentage points below their highs when measured in local currency terms. Brazil, India and Russia are skirting with new highs but China is still comfortably below its best levels following a series of credit tightening measures announced in mid-January.

But emerging market bonds have hit new highs. The yield on the benchmark J.P. Morgan EMBI+ Index has plummeted to just 6.32%; the spread or difference between emerging market debt and ten-year T-bonds has narrowed to 265 basis points or 2.65%. That's the lowest spread since before the credit crisis.

With interest rates still super-low and most governments reluctant to drain massive fiscal stimulus programs, the markets will continue to grind higher. Risk premiums have collapsed, short-sellers are running for cover and volatility is now at pre-2008 levels.

It seems irrational exuberance is back.

Have a good weekend. See you on Monday.