Near termed bull, longer termed bear

November 26, 20127 Comments

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 4th).  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. 16th) – also exactly 42 days.  The S&P fell about 8% in this recent selloff.  During the June 4th to September 14th 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.

 

7 Comments

  • Hi Keith

    If you expect the S&P to rise short term, (2-3months) do you expect the TSX to do the same.

    Thanks
    Joe

    Reply
    • yes–in fact I should have mentioned I am more bullish (near termed) for TSX–comparative RS is rising on TSX vs. S&P500, its actually the better bet in the near term

      Reply
  • Hi Kieth,

    I love what you did with the symmetry move made by the market on the decline. I actually did the exact same thing and took a shot on the long side. God stuff.

    Parm

    Reply
  • keith,

    do you think that the s&p will meet resistance at 1425, is it a major resistance? do you think this market has more leg for the seasonal investment period and will this period extend to the third week of january (inaugural presidency in u.s.)? listening to larry berman (berman’s call), i heard that he was expecting a s&p retracement at the 1100 level for 2013…

    good day.

    Reply
    • Hi Jean-pierre–nice to hear from you again. Yes, there is significant resistnace at 1420-ish. Until the Fiscal cliff problem is resolved or pushed forward, thats our ceiling. Thereafter, I’m thinking 1500-1550 for the S&P. As for timing, yes, I am thinking into late January or early February for the last peak of this topping process.
      Downside projection? I havent gotten there yet–leave that for another blog.

      Reply
  • Hi Keith,
    Thanks for your help in making sense of this mess (the markets) for us.
    The 42 day correction and 102 day advance cycle you subscribe to should bring the top on the S&P towards the end of February if my calculations are correct; not January. Please confirm when your suspect it will end this time and why. Are you factoring in the debt ceiling in the U.S.? Bill Carrigan believes that you cannot have 3 bear markets in 10-12 year cycle; his granddaddy bears were the tech bubble and the 08-09 financial crisis. Mr. Carrigan believes we should not have another granddaddy bear but some side ways consolidation or the beginning of a new bull cycle if I read him correctly.

    I would appreciate your comments.
    Thank you,
    John Ferrari

    Reply
    • John–first, thanks for the correction–you are 100% correct, I should have said end-February rather than end-January.

      My target of S&P to max out near 1500-1550 is based on a number of things, but largely on the prior ceiling at that level that has been tested twice in the past 12 years, and the 5 yr. cycle (noted here: http://www.smartbounce.ca/?p=1325). Note that I am not the only TA who has spotted this cycle–both RBC and BMO (mentioned here: http://www.smartbounce.ca/?p=1533) TA’s have written research reports on the subject–and both call for a cyclical bear coming soon. I understand Larry Berman is also calling for about 1100 on the S&P after a New-Year peak.

      Reply

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