Thursday, July 28, 2011

Is It A Bear Market Yet?

To rephrase Orson Welles from the accompanying 1970s commercial, "We will sell no stocks before it is time."

As noted in my Timing the Bear Market blog posting last month, bull market tops are different from bull market bottoms. Tops tend to have a rounding pattern to them in which sideways action leads to a rolling over phase during which price breaks below its 50 and 200 day moving averages and both moving averages cross and head downward. This action signals the end of the bull market, which is eventually followed by a cascading down of price in an accelerated fashion. Market tops also tend to produce divergences, both internal (intra market) and external (inter market).*

Do any of these conditions presently exist? In a word, no.

There is some evidence of this process underway but not to the extent needed to ring the bear market bell. But what of the big price swings these past months, investors might ask? It is fruitful to remember that big moves within trading ranges rarely have market trend changing qualities. Yes, there are the rotational aspects that can be exploited (sector to sector). However, when it comes to a market directional change, big price movements at key inflection points (including the aforementioned moving averages) have greater significance than intra trading range swings - regardless of the magnitude.

Investment Strategy Implications

Is a bear market headed our way? Most definitely. When? When the above related conditions are met.

The macro picture looks pretty dismal. Yet, it is vital to remember that stocks are primarily driven by two factors: valuation and financial market liquidity*. Only when the macro picture begins to impact these two factors will stocks be poised for a trend change: at the nexus of fundamental and technical analysis.

What might be the catalyst that provides the impact? Expansionary Austerity is the leading candidate.

*To learn more about the Mega Trend and Divergence Principle as well as the two factors, use the search feature at the top left of this blog.

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