June 3rd, 2008

Dusting off Bear Market Crash Call: Next 2.0% is Crucial

I don’t want to alarm anyone but looking over some MTI (Market Timing Indicator) data I came across an alarming fact. If the S&P 500 Index declines merely another 1.8% from today’s close to 1360, the MTI will trigger an “all-cash” move, clearly flashing a RED light.

What makes this even more distressing is that the sort of move that is being set up has occurred only once over the last 45 years and that was in November 1973, at the beginning of the 1973-74 Bear Market crash.

Let me set the stage. The other day, my blog had links to 14 graphs of the S&P 500 Index since March 1 in a sort of “S&P 500 Video“. If you look at the most recent, the May 21 link, you’d see the arrangement of the 4 moving averages and the location of the Index itself. All that it would take is a 1.8% move and the Index would drop below both the 90-day and 60-day moving averages, a clearly bearish position that undermines all the positive action that’s taken place since March 10.

Let me be clear, I first started writing about a Bear Market Crash in February. On February 24, I wrote:

An apology is in order. I may have left a mistaken impression in my post of February 15 where I said that there was a high probability of the market resuming its slide (I think I used some hyperbole and claimed that there were “10-20 days to a stock market crash”).

In no way was I saying that my Market Timing Indicator (MTI) was predicting an crash nor was I saying that if the MTI hit a certain level it would precipitate a crash. The MTI is a tool, like a thermometer or a thermostat, that measures the “temperature” of market momentum. It indicates at any point in time the direction and strength of the momentum prevailing at the time.

As a matter of fact, if the MTI regulates anything it’s the investors emotions. Rather than emotionally reacting to every bit of positive news (buying when the market has been trending down) or negative news (selling when the market is making new highs daily), the MTI gives the individual investor a benchmark that helps measure the emotions all investors as reflected in the markets momentum…..In the past, when the S&P-500 Index has declined as rapidly and as steeply as it has over the past couple of months, it has been unable to make a V-shaped recovery or form a short base from which the market resumes its advance. Sharp, rapid declines have usually led only to more declines.

Will it be the same this time? I don’t know and can’t predict. But you can be certain that this is not the time to “pick up bargains”. There’ll be plenty of time when the market’s put in an absolute bottom.

On March 1, I wrote a piece comparing 1973 and 2001 with the current 2008 market; I recommend that you dust off that previous report and read it carefully again. The action since March 10 may have been a temporary diversion and the Index, unfortunately, will resume the slide I indicated back in February and March had a high probability of taking place. In that piece I wrote:

The next support areas appear first to be around 1233 (down another 7.3% from here) and ultimately around 1150-1175 (another 11.% from here). That later level would leave the market 25% under the all time high of 1565 set on October 9.

I hope not to sound like a scaremonger but need to point out that a look at comparable charts of the 1974 and 2001 peaks are instructive for seeing what can happen when downside momentum grabs hold of market players. The 1973-4 market crash mirrors many of the same forces that are at work today (escalating gas prices, inflation, weak dollar, weak President … staglation).

If the Index does, in fact, drop another 1.5-2.0%, then I would certainly become extremely cautious and head for cash again. If it gets support and turns back up then a storm will have been averted and we’ll only have had to suffer through a squall.

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