Guilty until proven innocent

The S&P 500 is guilty of officially entering into a bear market this month, according to my rules, after the August lows of approx. 1870 were cracked (market close below that level)  AND the 200 day MA was violated  in January. Since then, the market had a brief rally and then another drop to yet another low a week ago. Lower lows, lower highs – what more do I need to say? Until we have a peak that exceeds 1940-1950 AND a move over the 200 day MA (10 month on the monthly chart below) that lasts for at least 3 weeks, I am operating in bear market mode on an intermediate termed basis. See my daily chart below with the annotations.

S&P nearterm

 

Keep in mind the need to be flexible. These are rules that make up the baseline of my risk/reward model. I’d encourage you to read my book Sideways for greater insight on them. Things can change—we can get the breakout through the last high and the MA, and we can go back into bullish mode on the intermediate termed level—with a new upside target of the old highs into 2135 or so. But that’s not happening right now, so I must consider the market guilty of  being in a bear phase until proven innocent.

BTW–The long termed bull will not be verified as back in action until S&P 2135 is taken out to the upside. But that’s a ways down the road, and not the topic of today’s blog.

 

Bear market rallies can fake you out.

Rallies occur in a bear market—just as pullbacks occur in a bull market. Pay attention to the rules above before getting too bullish—and be mindful of waiting for a few weeks as/if and when a spike through 1940 and the 200 day MA happens. Whipsaws happen. For example… here is the chart of the S&P over the past 20 years, with the last 2 major bear markets circled.

 

S&p LONG

 

In 2000-2002 bear market, the S&P 500 lost (peak-trough) 49%. Yet, there were plenty of strong up days and multiple up days in that bear market. Here is a chart from Chris Ciovacco demonstrating the head-fakes of that horrid bear market

 

Daily gains 2000 bear

 

In the recent financial crises, which pushed the S&P500 down 56% peak to trough, you can see the same pattern of head-fake rallies – chart again courtesy of Chris Ciovacco.

 

Daily gains 2008 bear

 

As a soothsayer once warned Julius Caesar – to paraphrase it to fit my needs—“Beware of bad things possible in March”

4 Comments

  • keith: so the messages I take away:
    1) by your measurements we are in a bear market, within an overall secular bull market, which is a good thing for long term investors.
    2) it would not be unusual to see some rallys within the bear, and don’t get caught long in those rallys.

    So what is the probability of the market going to 1940 during the next 6 weeks for argument sake? I’d love to unload some equity I currently have and
    From your early instincts, how low could this bear drop. You had previously indicated approx 1700 was a resistance point. From what you see today is that a probable support or are you pondering even a deeper drop is possible with the conditions we have?

    Always appreciated.

    Reply
    • Given that the S&P went over 1940 yesterday, I will predict with 100% certainty that it has reached my 1940-1945 target (grin). We sold some more stocks yesterday at that level. ValueTrend is now 35%+ cash.

      Reply
      • ok you are batting 100% on the rally upside and like you I was able to sell some.

        How about the 2nd part of the question…..
        From your early instincts, how low could this bear drop. You had previously indicated approx 1700 was a resistance point. From what you see today is that a probable support or are you pondering even a deeper drop is possible with the conditions we have?

        Cheers

        Reply
        • Thanks Daddyo–glad that you got some cash on the table – its pretty “ify” out there right now.
          Support at a minor level comes in at the low 1700’s. If things get bad–and I really have no clue if they will go this far–but if they do, then the 13 year lid that contained the S&P500 at around 1565 would be a worst case situation as support. It is my strong opinion that we are in a secular bull market. A break below the old resistance point that held stocks in a secular sideways period from 1999 – 2013 would be very bad–but very unlikely.
          If by some chance the S&P doesnt find support soon, or at 1700-ish, then 1365 would become a very enticing buying opportunity—- were it reached.

          Reply

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