March 14th, 2008

Bear Market Context

How long will this bear market last? When will it be okay to start buying again? Can we compare this market with any others in the past?

Actually, market action over the past several months has been as bad as any since 1963. Here are some statistics:

Facts you should know about the above table:

  • Bear market runs are those periods during which my Market Timing Indicator consistently signaled “All Cash” positions. For example, the longest run was first signaled on November 3, 2000 and returned to investable on April 1, 2003, or 601 trading days of being out of the market.
  • Most of the above Bear Markets experienced some decline before the sell signals and started their recoveries before the resume buying signals were triggered. The Indicator is “conservative” and waits for confirmation before issuing its signals. Agile traders can anticipate the signals and, by assuming some risks, seek opportunties for bigger gains.
  • Several of the “All Cash” runs had, as it turns out in retrospect, false investable signals but these reverted back to “All Cash” with anywhere from a day to the maximum of 24 days (during the 1973-74 Bear Market Run)
  • The 223 day run caused by the October, 1987 market crash signaled the only significant bad call. At one point during that run, the market actually declined nearly 7.4% but it also recovered relatively quickly. The Market Timing Indicator, however, didn’t signal an all clear for reinvestment until nearly a year later, after the market had more than recovered its loss and was, by that point, 11.2% higher than the November takeout level. Rather be safe than sorry, no?

The current bear run is a relatively short 53 days old. But the loss, at one point approximately 13% based on an intraday level towards the end of trading today of 1280 is the third largest in terms of to low point and end of run. Its steepness means that there will either be a remarkable surge recovery or that the recovery will be quite extended waiting for the moving average to drop down sufficiently to allow cross aboves to occur.

The questions you’re probably asking, as am I, are “when to buy back in and what to buy when the time is right?” I know the answer to the first question is “not now”. As I wrote in the last post ,

“what many were touting as a “symmetrical triangle” bottom has morphed into what many will soon call a “channel”, or “double” or “W” bottom. There’s nothing that would make this into a bottom except if the market actually reverses and breaks through around the 1400 level and crosses back over both the 60- and 90-day moving averages.”

The S&P 500 has made a round trip from the Monday’s Fed action to the bottom channel trendline.

Next week will be crucial. Are we going through the bottom of the channel? If so, the next resistance is at around 1230 for another way station stop on the way down to 1150. Or we’ll continue to see efforts to build at base-building, a step that could continue into the fall with little upward progress.

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