Friday, June 17, 2011

Timing The End of the Bull Market

''Let me tell you about the very rich. They are different from you and me.''
F. Scott Fitzgerald, "The Rich Boy"

Like the very rich, bull market tops are different than bear market bottoms.

Whereas bear market bottoms tend to be panicky affairs (probably has something to do with real losses versus opportunity costs), bull market tops tend to be drawn out affairs. In the process of forming its top, the dying bull experiences 3 distinct phases – sideways, rollover, and breakdown. The time period between each phase varies but a look at the last 2 traditional market tops during the first two phases - sideways and rollover - should help time the next market top.

The first 2 charts illustrate that the time period of sideways to rollover was 11 months (1999 – 2000) and 8 months (2007), respectively. The third chart shows that the current sideways US stock market action (S&P 500) is six months in the potential top making. If sideways evolves into the rollover phase (when price crosses the moving averages, the shorter term moving average crosses the longer term one, and both moving average point downward – a/k/a my Mega Trend*), one could assume it would take place sometime in the not too distant future (did someone say September?).

Until we get a definitive rollover of the sideways action, only the amazingly clairvoyant know for certain that the current sideways market is a distribution (meaning top) and not a consolidation phase**.

*Use the search function on the top left to find prior commentaries describing the Mega Trend.
**A consolidation phase is the pause that refreshes as the resumption of the bull market gets underway.

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