GETTING TECHNICAL
Are We in a Bull Market Yet?
By MICHAEL KAHN
The technical evidence suggests that we're still in a bear-market rally. So get ready for a pullback.
WITH SO MANY PUNDITS arguing that we have finally entered into a bonafide stock-market recovery, it's worth studying how the current stock rally stacks up with the last true early bull market in 2002-2003.
While there are many structural similarities on the charts, there is one factor that is very different.
As of this month, the current rally has not yet reached, let alone broken through, a trendline that defined the bear market from its October 2007 peak. That makes the current rally still officially of the bear-market variety.
To be sure, bear-market rallies can carry on for a long time, and that means it is possible for the market to touch its bear-market trendline before all is said and done. If the trend continues at its current pace from March, then it is possible that 1100 on the Standard & Poor's 500 is in the cards.
That is a tough pill for a bear like me to swallow.
One precedent for this possibility comes from the 1972-1974 bear market when the index shed just under half its value. The ensuing bear-market rally lasted nearly two years and regained more than three-quarters of what was lost before the next bearish cycle took hold.
I am not saying the current rally will last that long, and I do not believe it will reach 1100. The point is that after brutal bear markets, when panic sets in and the world seems as if it is about to end, recoveries can also go "too far" before equilibrium is restored. The pendulum swings too far in both directions.
Before moving on, let me restate that I do not think this type of gain is likely. But ignoring the evidence on the charts that does not fit in with one's theories is always a bad move.
Several months ago, I began to look at the exact slopes of the two bear markets starting in 2000 and 2007, respectively. Using basic trendline drawing techniques, I was amazed to see that the two bear markets had exactly the same initial rates of decline. In other words, the trendlines drawn from their respective peaks were exactly parallel.
Further, several trendlines drawn from the final "crash" to respective major lows were also parallel (see Charts 1 and 2).
Chart 1
Chart 2
The big difference was that the 2007-2009 bear was 17 months from top to bottom while the 2000-2002 bear was 24 months for the S&P 500 and even longer for the Nasdaq. What this means is that the market fell much harder during the most recent bear, and to me that means it needs more time to recover.
Much has been written about a huge inverted head-and-shoulders pattern that was broken to the upside last month. When a similar pattern completed in 2003, the market never really looked back so it is no wonder people are excited now.
However, the bear-market trendline was already broken to the upside so the move above the huge pattern was confirmation of what had already triggered -- a bull market. Fast forwarding to today, the corresponding bear-market trendline, as mentioned, has not been broken.
We can debate how high the rally will continue and reaction in the post-Fed days to come should be telling. My thesis is that the gyrations and emotional disruptions of the bear market have not been fully resolved. That means that I do not believe the bear-market trendline will be broken during this bear-market rally.
For the S&P 500, there is a level I am watching very closely in the short term. Several factors are converging on 950 as the do-or-die level, where my thesis is proved right or wrong. At that level, the rising trendline from March, the horizontal support from June, and both the 50- and 200-day exponential moving averages all meet.
If I am right and 950 does not hold as support, then another scary selloff is in the cards. However, I do not see new lows being reached.
If I am wrong and 950 serves as a springboard for the next leg up, then I will have to admit that 1100 is entirely possible.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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