Near termed bull, longer termed bear

In last week’s market commentary, I noted 5 reasons why the market might rally. Here’s the link: https://www.valuetrend.ca/?p=1618. I’m happy to report that markets are up more than 3% since writing that piece. The question is, will the rally continue? My belief is that this market has some legs left in it, given some volatility along the way.

Please don’t read into my near-termed bullishness that I’m looking for a new leg in a bull market. Far from it. I continue to hold to my long termed belief that the S&P has entered the topping phase (also known as “phase 3” aka my book Sideways). This means that there can be at least one more rally, and possibly two rally/pullbacks left prior to the emergence of a new bear market (“phase 4”). So call me short termed (2-3 month) bullish, longer termed bearish.

There are a few more pieces of evidence that I can add to last weeks outlook for a rally into the New Year. 

1. Corporate insiders, who had been selling heavily, have started buying. The Vickers Insider Report shoed that near the market high in September, insiders were selling. At that time the insider sell-to-buy ratio just about double its average sell ratio. But last week insiders started buying again. The Vickers sell-to buy ratio is now less than half its long-term average.

2. The American Association of Individual Investors (AAII) is a ‘contrary’ sentiment indicator – one of many I follow. Individual investors tend to be bullish at market tops, and bearish at bottoms. The AAII poll hit 48% bearish on November 11, only 3 days before last week’s rally began. The last time the AAII poll was 48% bearish was on September 22 2011, just as the big rally of October to May got underway.

3.  History repeats itself. The pullback this spring (April – May) lasted 2 months (April 2 to June 4^th).  More precisely, this was 42 days. The S&P 500 fell 10% from the high.  The recent pullback that started in September also lasted two months (Sept 14- Nov. 16^th) – also exactly 42 days.  The S&P fell about 8% in this recent selloff.  During the June 4^th to September 14^th rally, the market climbed 15% over that 3 month/ 102 day period (the S*&P rallied from 1275 to 1465 closing prices). A similar 15% rally over a similar time period from the mid-November lows would bring us to 1550 by the end of January. That level, coincidentally, is the top of the trading range for the S&P over the past 12 years. It is my opinion that 1550, should it be reached, may be the maximum upside potential for the current bull market before the next bear market begins. Patterns can repeat themselves.

4. Seasonal’s are strong at this time of the year for the markets. November – January  are, according to Brooke Thackray (aka Thackray’s Investors Guides), the “best 3 of the best 6” months. Thus, we are betting with history if we look for upside in the coming months.