The good news
I read with great interest a recent report from my favorite market statistician, Jason Goepfert (www.sentimentrader.com). Jason points out that the Dow Jones Industrial Average—which we have data on going back to the late 1800’s, has seen only 26 times where the market has experienced similar conditions as of late. That is, 3 months or longer of no corrections, followed by an eventual 10% correction, and then a 5% + rebound in the next 5 (or less) days. When one of these moves occur, such the recent selloff and last week’s 5%+ rebound, it leads to some upside. Under such conditions – markets tend to follow up with multi-month upside. That’s the good news.
The bad news
The bad news is that such a pattern often leads into severe bear markets. The market typically succumbs to the bears after 3-6 months of upside. Statistically, the market was (on average) net negative one year later after the 26 occurrences of this pattern.
This ties in well to my theory that we are in the final stages of the current bull market. Call it “wave 5” aka Elliott Wave Theory, or just plain old business cycles – it is likely that the current bull market is growing long in the tooth. I’ve discussed this potential on this blog a few times, including last October.
Above is a monthly (big picture) chart of the S&P 500 with the 4 phases of each market numerated on the chart. I have covered how the 4 phases of a market work on this blog – and in my book Sideways. According to how I view the cycles of the market (aka the 4 phases), we are still in “Phase 2 bull market” mode. A break of the 200 day (10 month) SMA and a lower low on the chart can suggest the end of the bull market. Its best to confirm if it stays below that level for the better part of the month. Exceptions to this rule – and even outright head fakes – can occur. The recent bull faked us out in 2010 and 2011. But most of the time it’s a pretty good way of staying in during the bull markets and getting out before too much carnage ravages your portfolio.
The bottom line: it ain’t over until its over.