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Posts Tagged ‘Bear Market Rally’

Back in March of this year when the stock market found a bottom, I posed a question that I felt would be “the” question for investors. Is this a bear market rally or is this the beginning of a bull market?

I have felt all along that this is nothing more than a bear market rally. A bear market rally is a pause in the bear market where the stock market goes up for a period of time.  Think of it as the bear resting and gathering energy for the next big decline. 

Of course, if it is a new bull market, then the March low of this year was the worst that it will get. 

I believe that we might be getting close to finding out.  Many of the indicators are stating that the moment of truth is here.  If this were a healthy normal market, we would at least see some type of market decline in the course of a new bull market.   I think that we might have already started that process.  If this is a bear market rally, then this decline will morph into something serious.  This should be a big test. 

For this stock market to change from a bear to a bull, the important level for the S&P 500 to reach would be 1121.  The S&P 500 would have to surpass that level and stay above that level.  If that were to occur, the evidence would support a major change for the stock market trend.

The unemployment numbers came out again this past Friday and showed more disturbing news for the economy.  Remember, if they cannot fix unemployment, this economy is going to have a tough time getting going again.  Unfortunately, Obama’s answer to more jobs is Government jobs through the stimulus program.  That is not the type of solution that will solve this problem.   

According to the Government’s “version” of the unemployment report, we lost 216,000 jobs. Of course, that was after they “added” back in 118,000 jobs that they created out of thin air.  As a review, each month the Government “estimates” the number of jobs created each month that they “feel” the Department of Labor misses.  It is such a farce. 

The number of those jobless as well as the overall unemployment rate is much higher than reported.  It is an absolute joke that they continue to report this garbage. 

I wanted to give you a link to an article about Robert Prechter.  He is a well regarded market analyst that has called major tops and bottoms of the market.  He uses a discipline called the Elliot Wave Theory. According to Elliot Wave, we have again hit a major top and it is about to get ugly.  Who knows if this is right or not?  I do know that he has a very strong track record and warrants some attention. 

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Well, I took the wrong time to take a vacation. A great deal of very important things occurred last week in the stock market and investors should be extremely cautious.  This morning I will take some time to get you caught up on what is occurring with price levels as well as what I believe to be a fundamental shift in the stock market. The stock market has been in a stock market rally from the middle of March at least until June 11. Since June 11, the S&P 500 has declined -7 %.

One of the themes that I have written about since the low in the stock market in March is the overall future direction of the stock market. If you ask most people on Wall Street, they will say the worst is behind us and we have started a period of recovery. I have argued the opposite. I feel that we are in a long-term bear market that started in 2000 and could last as long as 18 to 20 years (based on history).  Concerning out current situation, my analysis would suggest we have been in a bear market rally. This is a period of time where the stock market stops declining and starts what looks like a period of prosperity and recovery for investors.

These are mean periods of time for investors because they fool the vast majority of people into believing that the worst is behind us. When you look at how far up the stock market went in a small amount of time, it certainly would appear that the worst is behind us. At the same time, it also looks just like a typical bear market rally and not the start of a period of recovery.

Since the March low in the stock market, the question has been how long and how far the stock market will go up. It is a little too early to declare that the stock market rally is over. However, the evidence is building. The problems are becoming much too loud to ignore. So, let’s start with the evidence. We always want to look at price levels of the stock market. Price levels are determined by where the stock market closes at the end of each day. They can tell us a great deal about the level of risk that we are facing.

If we manage to stay above certain price levels, then stock market investors should feel comfortable with taking risk by investing in stocks. However, if the market closes below certain price levels, then the probability increases that stock investors will lose substantial amounts of money. On June 11th, the S&P 500 reached its highest price level since the March low. That closing price level for June 11th was 944 on the S&P 500.

As of last Friday, we were at a price level of 879. The price level of 878 is the first level of risk for the stock market. Last week the S&P 500 fell below that level but has not closed below that level. Remember that the closing level is the most important one to watch. Once that level is broken, the next danger zone lies between 814 and 779. If you are heavily invested in stock, you do not want to see the S&P 500 fall below 779. In that event, I would think that the next price level down could be as low as 719 all the way down to 666.

The price level of 666 is extremely important because that was the March low of the stock market. In the event that would happen, that would be a considerable low and loss to stock market investors. For now, let’s not get ahead of ourselves. Keep in mind that investing in stocks is all about monitoring your risk. One of the best ways to do so is by monitoring price levels.

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Since we changed the daily stock market outlook to a stock market alert format, there really hasn’t been much to “alert” you about concerning the markets.  So, I thought I would just start off this Monday with a quick update.  This should be a relatively quiet week with very little breaking economic reports being released.  Since May 8, the S&P 500 has dropped about 50 points.  From the standpoint of what the S&P 500 has been doing over the past 9 weeks, that really wasn’t that big of a deal.  I want to circle back around to the one question that every investor should have in the forefront of their minds.

Is this the start of a new bull market or just a bear market rally that precedes another bear market route?   The answer to that question would determine every decision you make concerning your investments.  The best way to start answering that question is by looking at price levels.  If you are new to this market commentary, price levels are very easy to understand.  First, I always focus just on the S&P 500 and we always look at what price level the S&P 500 closes at each market day.  The S&P 500 closed on Friday at a price level of 882. 

Price levels are road markers that tell us where we are on the journey of investing.  If we successfully pass the right price levels, then we know we are on our way to our destination.  However, if we start passing road markers or price levels going backwards (losing money), we need to assess if we are lost and off of the correct road.  So, we look at the price levels that represent caution, a positive outlook for our journey, or a negative outlook. If our road markers are showing that we are on a good road, then we stay the course.  If the road markers (price levels) are starting to show yellow signs or caution, then that means we might need to change the course of our journey.  We do that simply by changing our investments.  If the road markers or price levels show we are lost, we want to change directions.

So, the road marker or price level that would warrant caution for investors is anything below 875.  Last week, the decline did not go that far.  A positive for the stock market would be anything over the price level of 950.  So, let’s see where a week of mild economic reports takes us.

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Today offers us a good example of what happens when the illusion of confidence is broken.  Let’s start with the headlines this morning:

Stocks Sink as Retail Sales Slide

You mean to tell me that people aren’t buying things?  I am shocked!!  I thought that everything was recovering and OK.  

Then there was this headline –  U.S. Foreclosure Filings Hit Record for Second Straight Month

You mean that President Obama’s programs aren’t fixing the foreclosure problem?

Of course, as I write the stock market has a decline of -1.78% for the early morning.  Investors act surprised because of the creation of false hope that is propagated by Wall Street, the media, and the politicians.  This is also why I believe that we will continue to see this bear market for a longer timeframe than most expect.  This is a game of confidence.  The establishment wants everyone to think that there is no risk and we are on our way to recovery.  Call me skeptical – I just cannot imagine that a country that is still stuck in a financial crisis is all of the sudden recovering from problems that were created over decades. 

The real danger occurs when the establishment cannot even build false hope anymore. 

As far as price levels go, watch the S&P 500 today if we decline down to 875.  That will be a key price level for the stock market to stay above if there are any hopes of this current bear market rally staying alive.

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Well, the results of the stress tests were revealed this past week.  It turned out to be much ado about nothing.  In fact, most of the banking stocks went up on the news.  It does leave the question as to what the Obama Administration is really trying to accomplish through a process that didn’t make much sense.  For now, we will leave speculation for speculation’s sake.

I found it interesting as to the criteria that was used in stress testing the banks.  They were looking for how the banks would react to the worst case economic situation.  Over the weekend, Alan Abelson wrote about the criteria in his article in Barrons:

“The “worst-case scenario,” as the cliché goes, that the Fed crew was able to dream up was one in which the unemployment rate, already a hair under 9%, would rise to 10.3% next year, housing prices would fall another 22%, and the economy — which has been shrinking at more than a 6% annual rate the past two quarters — would contract at a 3.3% pace.”

Well, I think that we could easily see 10.3% in unemployment.  Of course, that is dependent on how aggressive the Government gets with their monthly job “estimate.”  A decline in growth of 3.3% is also not unlikely.  That scenario would produce 599 billion dollars of loss for the banking system.  Now can you imagine the armageddon outlook if you were to come up with a realistic worst case scenario?  

Then there were the unemployment numbers.  I wrote about the numbers in detail on the Prudent Money Blog this morning.  It is funny that no one is writing about the creation of the 226,000 jobs out of thin air estimated by the Government in the jobs report.  Can the Obama Administration really pull off this illusion making everyone think that everything really isn’t that bad?

Well, the stock market certainly thinks so.  The market continued the rally this past week.  Thus far, the S&P 500 is up 40% from the price level of 666.  This falls right in line with what happened in the 1929 bear market.  The major stock market rally in that bear market was up 46%.  Keep in mind that even with this stock market rally, we are still a little bit over -40% from the highs in October 2007. 

I put together a very detailed analysis in my recent letter to my clients.  After going through that process, I have some very strong technical evidence that this is nothing more than a bear market rally and its days are numbered. 

Keep in mind that everything gets exaggerated in this type of bear market.  The moves both up and down are much bigger.  Guard your risk very closely!

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Hello, my name is Bob Brooks, and I am a gloom and doomer. 

Well, sometimes I feel like I need to go to a 12 step group.  While everyone is popping the champagne bottles on Wall Street and the market puts in yet another strong day, I still stick to my guns about what is occurring.  So, let me give you a few possibilities in the near-term.

1)  The market falls apart on some pretty bad news and heads back down to the March lows. 

2)  The market declines for a period of time.  However, it does so constructively and then continues the bear market rally to new highs.  This could end up taking a few months, but it would ultimately return back to the bear market.  Of course, no one will even entertain that notion.  However, that is what a bear market does.

3)  We are in a new bull market, never to return to the bear market decline.  The worst is behind us. 

The market is not only at a dangerous spot right now but it faces some very big news.  We have an unemployment report this Friday and then we have the results of the stress test.  I am going to make an off the wall prediction.  I think that the Government will tinker with the unemployment numbers to actually make them look very good in order to offset the bombshell that they will drop with the stress results.  They keep changing the date of the release of this information which makes one wonder what is actually occurring.  Why in the world would they release this information the same day as the unemployment report?  Once again, it doesn’t make sense.

This morning pending home sales came out pretty strong and all of the sudden the real estate crisis is over with.  I wouldn’t jump on that party wagon just yet.  Bryan Rogers, who does all of the wonderful graphics and artwork for Prudent Money, made an interesting statement to me.  He said you have to take all of the technical analysis that you follow and add in the deceptive media element. 

I might turn out looking pretty foolish with my negative outlook.   However, I did not feel different in August and September of 2007.  Everything is not always what it seems!

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Well, yesterday continues a strong performance for the stock market.  Remember we are still focusing on one question.  Was the low in the stock market in March the bottom of the bear market and the start of a new bull market or was the stock market rally that started in March nothing more than a bear market rally?  This is one of the most important questions to continue exploring at this juncture. There are huge risks for either answer. 

If you are not properly invested and this is the new bull market, then you are really missing out on recouping your losses.  If this is nothing more than a bear market rally, then the potential for extreme losses for stock market investors still lie ahead. 

For those of you who read my daily outlook blog, you know that I believe this is a bear market rally and a great opportunity for those who are heavily invested in stock to take advantage of this big move in the market and reduce your risk by selling stocks or stock mutual funds. 

As I started writing last week, my indicators are flashing caution right now and suggest that the risk continues to climb for anyone invested in stocks.  The market is truly ignoring some negative items.  Growth for the economy was announced yesterday much worse than expected.  We had -6.1% growth last quarter and the growth numbers for the first quarter were revised and reflect a worse first quarter than originally reported.  The last 6 months were the worst since 1958.

Foreclosures are climbing.  Swine flu should now be on every investor’s radar as this is just about to be classified as a pandemic.  The first of what I believe will be two automakers declared bankruptcy this morning.  The Government is going to be selling 71 billion dollars worth of government securities next week (read: printing money).  Finally, unemployment continues to weaken as evidenced in this morning’s new weekly jobless claim numbers (another record). 

All of this is occurring, and the consumer confidence number increased by 50% with the highest read since November 2005?  Are you kidding me?  As I have written many times, there is a great deal of evidence that exists that economic numbers are doctored.  There is just no plausible explanation for a rise by that much during a time with this much negativity.  However, keep in mind, we just “celebrated” (it certainly seems that way) President Obama’s 100th day in office.  It sure would be fitting for the stock market to have made money in his first 100 days as well as a huge rise in consumer confidence due to everything he has done in office.  HMMMMM…I follow this data very closely and it doesn’t add up.  It looks more and more like an organized PR campaign.  Let’s just all hold hands and believe there is no risk and the government will take care of everything.  If you are not paying attention to what is occurring out in front and behind the scenes please start doing so. 

Agree or disagree and think I am a conspiracy nut, things don’t add up.  I am just writing what I am seeing and staying away from the kool-aid that is being consumed in mass quantities.  For now, be careful with your risk.

with your risk.

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