March 21st, 2010

Is The Market’s Tilt Changing?

I feel the market is tilting? Its rate of ascent since the March 9 low has continually and inexorably been flattening with the rate of change, or slope, shifting from steep to nearly flat as depicted in the following charts (click on image to enlarge):

We all look back fondly to last year when, if you had the courage, you could buy nearly any stock and see it appreciate handsomely within weeks or months. Then in November, rather then bouncing off the lower trendline and heading to new highs, the Index began barely crawling along the lower boundary trendline. On January 19, it hit the magic 1150 level and broke below the support.

We hoped that the break would be minor and the bull market continue albeit tempered. But those hopes were dashed when the lower boundary of that less steep upward channel was also broken. The correction finally found an intra-day bottom at 1044 followed by the most recent nearly 10% bounce.

Paul Lim in Sunday’s NYTimes recaps the challenges of the second year of a bear market recovery:

  • In nine of the last 10 market recoveries going back to 1932, stocks gained ground in the second year after a bear market…[but]…if the rally continues through 2010, the year “is unlikely to be anywhere near as rewarding as the past one,”
  • … second years of rallies are almost always less fruitful than the first. Only twice has the S.& P. 500 index gained more than 12 percent in the second year after a market bottom. And the average gain was just 9 percent,
  • …Year 2 has been particularly challenging after bear markets related to recessions. In the second year after the most recent bears in this category — which spanned from 1980-82 and 2000-02 — stocks gained only 2 percent and 8 percent, respectively.
  • … using 10-year average corporate profits, the market’s price-to-earnings ratio is 20.6. That’s noticeably higher than the historical average of 16. In periods when the market’s P/E ratio has been between 19 and 25, the average real return for stocks over the subsequent decade has been 3.8 percent after inflation…Assuming that inflation is around 3 percent, stocks are likely to return less than 7 percent, which is lower than their long-term historical gain of around 10 percent a year.

If last week marks another top, then the market’s upward bias will be further compromised and trend flattened even more:

I looked at all my postings since January 1 and they reflect the ambiguity of the market itself. In January, I write about “dominoes” falling in a long anticipated and significant correction. In February, I advise using bounces as opportunities to further lighten up. Finally, in March, I assemble watchlists of stocks that could lead the market as it moves in the next leg of the bull market.

While there’s no market momentum, I got swept up in the excitement of 9 consecutive up-days and identify one bright spot, stocks in Retail-Restaurants group. Tread carefully, however, because this market can still move in either direction when volume returns.

Subscribe below or click here to learn more about help for navigating turbulent markets.
  • Jesse

    Joe, to add to this blog, take a look at this longterm chart. Notice the double top action in 2007 before the big crash. You will see the same rollover occuring in the MACD and the Full STO. The markets in a topping phase. How long it lasts is the question.

  • Joe

    Jesse, I see that but wasn't there something similar at the beginning of 2006 and the market continued to steam ahead for another 18-24 months?

  • Jesse

    the current conditions in our economy don't tell me that we're on the verge of a new bull market. The markets have already had a historical run over the past year. It seems like the risk reward for going long here is not good, but there are always people who chase the market and those who buy at the top. I believe the Euphoria will end sooner than later. We may have a sideways move for the next few months before she finally rolls over.

  • Jesse

    and to your point, no the markets did not look like this in 2006. look at the chart I posted. In 06 the MACD was no where near as high, which indicated the market still had a lot of room to run up.

  • Minnesotalee

    JC- heed the technicals Jesse (JC) and you will maybe get back to even; you just continue to be wrong- awhile back you said 1150 was the top. Well look at the scoreboard. I just don't understand your logic- "topping-out"???

    The charts have just come out of a reverse H&S formation in February and the Dow theory of DJ30 and Trans index making new highs together indicate forward momentum.

    My tech method, again, after a positive pullback have given a resounding buy signal at 1160 on the S&P w/a PO of 1350!!! JC keep up your negative work, and we bulls will prosper. After all I need to keep JC in the game so I have someone to buy stocks from.

    I'll get back to this site again (to see what JC will say then post 1350- I have fun with his spiels) to defend the champion of this blog.

    Great continued work to you JOE!!!

  • Jesse

    Lee, I understand you hang on every word I say. I'm honored, but you give me to much credit. I'm still a whole lot closer to 1150 than you are to 1350, so lets not get to giddy just yet. we can get to 1200-1228 and I'll still be closer to my number. any comments on the chart and what I was pointing out or would you just prefer to continue to play cat and mouse?

  • Minnesotalee

    But JC we are closer to 1350 than your prediction of 950 you were predicting a few months ago. Obviously to get a buy signal here at 1160 it is closer to your 1150 you are right but your fact is nonsensical. What is your prediction of what you will blog after 1350. Let me here it now. You are too damn negative for such a bullish positive blog site. I don't want anyone in this current market POSITIVE movement to be listening to you spinning this market. The investors here want forward indicators to predict what will or might happen based on current technical patterns. Just show me where these pattens we have now are pointing to your topping phase. What about the reverse H&S in February? What about the Dow Theory DJ30 and Trans index indicating a cont'd bull? and what about P&F charting (yes I said it) doing the same? None of these look like your patterns of yore. None of them indicate a topping out. Nothing indicates getting to your 950 not 1150. You said 1150 was a top and 950 was the next move a couple months ago. Well?? What about Yellen today predicting 3.5% GDP for 2010 and a 30% inctrease in GDP for 2011. What about the 4th quarter 2010 where I said in January here that we would get over 5% GDP and you thought I was dreaming? Yes you said it here, and I guess you were wrong. I guess I was dreaming. Maybe I'm dreaming about S&P500 of 1350. Statistics are on my side not yours of 950 or lower. It's all about technical predictions. The 70% gain in the markets are just a recovery due to the Lehman effect. That move from 666 to over 1100 was a "V" recovery to get back to that point. But I'll be back to find out your reading of 1350 once it happens this year. Lastly I hang on your words because they need to be rebutted. So long JC. Finally you asked how long will the topping phase last before it goes down. Well you were wrong on two fronts. The topping phase lasted only to penetrate the 1150 top in February; pulled back in a healthy fashion by 10% and is marching on through this level. It took about 2-3 trading days to cross it once reaching it. It's going up not down and it's DONE topping out!!! You can still make money here but you must CHANGE (oops).

  • Minnesotalee

    JC- I will feel honored when you finally believe. Until then don't.

  • Jesse

    Lee, all I can do is laugh. If you yell YES WE CAN! loud enough, we might get to 1350 this year. One thing I do not doubt is that the US government will continue to print money and artificially prop up this economy. Euphoria is here to stay! Obama saved the US! The economy has been fixed and we're in growth mode. That's why the FED has yet to move rates?
    Look at the chart I posted and you will understand why I see a topping period occurring. And again, comment on the chart and explain why its wrong based on all your bullish indicators. Thanks Lee, every Batman needs a Joker

  • Jesse

    Lee, I bet we hit 950 before we hit 1350! 😀

  • Pingback: Elongating the Head and Shoulder Top | Stock Chartist()