May 17th, 2009
Is the bear market over?” That’s the opening line of Paul Lim’s excellent article this week in the NY Times reviewing the arguments concerning whether we’re at the top of a suckers’ rally or at
“the start of a secular bull market, of course, but it’s hard to say with certainty, because a new secular bull would require not only rising stock prices, but also new all-time inflation-adjusted highs in major stock indexes. That means the S.& P. 500 would have to climb to at least 1,890, which represents its March 2000 peak of 1,527, adjusted for inflation.”
Some are skeptical since secular bull and bear markets have historically lasted 15 to 25 years indicating that the market is still perhaps a decade away from the end of the secular bear. The conclusion of most is that “We could be in store for a couple of years of below-trend growth” (Duncan W. Richardson, chief equity investment officer at Eaton Vance) and “the market could move sideways for a very long time.” (Jeremy Grantham, chairman of GMO).
For an investor who prefers to more actively manage their portfolio, those are viable answers but the wrong question. The critical point is not when the market will be able to regain and surpass its previous all-time high but “when will this current correction end and how much further does it have to go?” Will the correction retrace 25%, 37% or 50% of the move since March 9 or, in the worst case, will the correction carry the move to new low territory?
On May 6, in “Breakout or Resistance: The 200-day MA in the Beholder’s Eyes“, I speculated on one possible course which the market, to date, seems to be following perfectly. Here’s the chart from that post:
As of Friday’s close, the Index was about half-way to the first dotted-line at around 835-840, a potential trough of the right shoulder. If it doesn’t turn up at that level, the next support would be at 800.
Another indicator I like to watch (in addition to the number of stocks above 90-,180- and 300-day MA’s or stocks having made “Golden Crosses”) are the number of stocks that actually already in bull mode as indicated by the perfect alignment of their moving averages (60- over 90- over 180- over 300-day MA and price being above them all).
As of Friday, only 70 stocks have these perfect alignments (click here for a complete spreadsheet list) and, interestingly, 19 of the 70 are members of IBD’s top 100 stocks representing close to 20% of that list. It doesn’t sound like many, a mere 1.3% of all stocks, but more than at the March 9 bottom (41). As a matter of fact, as an indicator it may lead the Index since at the peak on July 17, 2007, the number was only 35.
As the weeks go by, we should expect to see the number increase. What do these charts look like? In each case, it’s the arrangement of the current price relative to each of the moving averages and alignment of each MA to the others. Here are a few examples: