Tuesday, January 13, 2009

The Beginning Of A New Bull Market?

It is safe to say last year was certainly a bear market given the market return was one of the worst on record. However, since November 21st, the S&P 500 Index bounced off of its low of 741.02 and climbed to 943.85 on January 6, 2008. This represented a return off the bottom of 27.3%.

From a pure technical perspective, many strategists classify a bull market as one where prices generally are rising faster than their historical average over a period of months or years. Some strategists require the market to rise 20% following a low that resulted in a 20% decline in prices (bear market). Last year was a bear market for sure.

As noted above, the market has advanced from its low to a high point this month that generated a return greater than 20%. As the below chart details, the markets could be in the beginning stages of a longer term trend of higher prices.

(click to enlarge)

S&P 500 technical analysis chart January 13, 2009
There are some technical positives and negatives that can be gleaned from a quick look at the above chart.
  • (-) the market closed below its 50 day moving average
  • (-) the fast (green) MACD line has crossed over the slower red line
  • (+) market closed above support around 868
  • (+) higher volume on up market days
  • (+) market still in a short-term uptrend
Technical analysis alone is not a certainty, but it does provide insight into the psychology of the market. Other factors need to be taken into consideration, not the least of which are economic ones. However, history does have a tendency to repeat itself.

There have been ten prior market cycles where the market experienced so-called "waterfall" declines like the market experienced in October and November 2008. Ned Davis Research prepared a graphic representation of these ten declines covering 1929 through 2002. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab (SCHW), highlighted NDR's research in a recent strategy article. Liz Ann noted:
In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.

However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market. The chart below shows the performance of the Dow as averaged from the 10 waterfall declines between 1929 and 2002.
(click to enlarge)

waterfall market declines chart Ned Davis Research January 2009
It is probable the market is in the second phase of the above chart, i.e., a month and a half past the November 2008 low.

The economy and market undoubtedly have "issues" that need to be digested; however, the market tends to be a leading indicator and will forecast an improving economic environment with about six months lead time. Could we retest the November 2008 lows, certainly. Remember though, the news media was touting the fact oil was going to $200 per barrel last year right about the time oil hit its high around $150 per barrel. Today, the news media does not have much to say about the market or economy that is positive. What is important is where is the market going looking forward and not where has it been when looking back.


"Happy New Year" May Be True In 2009!
Excerpt from Schwab Investing Insight
By: Liz AnnSonders, Chief Investment Strategist
January 2009

Disclosure: Long SCHW

No comments :