March 2nd, 2007

Revisiting the "Secular Bear Market"

I may have been too sanguine about the drop on Wednesday, when I said:

Yesterday’s drop brought it exactly to the trendline. It could hover around this level for several weeks until it converges with the 90-day moving average line (blue); by that time it will clearly within the channel. That pattern (lateral movement) will be either the consolidation pattern leading to another leg up or a top.

This has truly been a trying time to be a momentum player …. unless you swing to both ways (long and short, that is). Over the past week, as the market has moved fairly consistently downwards, I’ve incrementally gotten off margin and now have just under a 15% cash position. I also took a small position in S&P puts going out to June.

I learned my lesson during last years May-August correction that you have to be quick and have the stomach for shorting individual stocks. I did it but barely broke even after a host of trades; the only one who made money was Fidelity. So I vowed that, should the occasion arise in the future I would only be in cash and either stay in cash, short the index ETF’s, purchase put options or some combination of each. That’s what I’m doing this time around.

A logical question is whether stock charts gave any indication that a correction was imminent. My answer is that none of the individual stocks or sectors I own/owned in my portfolio showed signs of weakness since I had previously rotated out of any that did. The only indication was that the market, overall, was extended (as I mentioned in my February 28 posting).

At the individual stock level, the indication that caused me some concern before this past week was that many stocks, (particularly tech stocks) had recovered to levels that were previous highs way back 5-7 years ago. You could draw a perfectly horizontal trendlines from those highs and recent prices were currently bumping right up to them (plus or minus fractional percentages). Yes, there have been many stocks that long ago moved past those peaks and continually generated new highs over the past several years.

However, what the incidence of many stocks struggling to break through to new all time highs indicated to me … at the time and in retrospect …. that the market may now be struggling with a breakthrough the constraint of the “secular bear market”. Ultimate success will require much good background news; any bad news would provide reasons for them to pause and retreat, and will extend that bear market.

Some of these charts are examples:

  • Cognos (COGN): Click here for chart
  • Intuit (INTU): Click here for chart
  • Webex (WEBX): Click here for chart
  • Digital River (DRIV): Click here for chart
  • Clorox (CLX): Click here for chart

When these sorts of stocks do breakthrough, we’re going to be out of the secular bear trap, all the bad and frightening news today will fade into history and we will see a huge bull market.

stay tuned for more on using IBD’s weekly data …..

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