Will Expected Rally Be Part Bear or Bull?

With both the S&P/TSX composite index and the S&P 500 oversold to a degree rarely if ever seen on many medium and long-term technical measures, the data suggests a tradable rally is germinating around the recent lows, according to RBC Capital Markets technical analyst Ray Hanson. This rally is set to play out as the year winds down and into the middle of the first quarter, he said.

Mr. Hanson said:

The stage is set for an intermediate rally, and the upside percentages can be large, Mr. Hanson told clients, noting that the first level of resistance for the TSX is near 10,200, and then the 40-week average near 12,000. For the S&P, intermediate resistance is between 1,007 and 1,044, while the 200-day average is near 1,230.

However, the real question is whether such a rally will be another element of an ongoing bear market or the start of something more sustainable such as a new cyclical bull market.

Both August 1982 and October 2002 marked four-year market cycle lows that launched five-year market runs – the only two such runs since WWII, Mr. Hanson noted. While there should have been a typical fourth year of cycle correction or bear market in 1986 and 2006, this was bypassed. The unfortunate implications were felt with the crash of 1987, he said, while the bypass in 2006 is still hitting us today.

The analyst is looking ahead to June 2010, 32 months after the October 2007 highs. He compared this to the height of the tech bubble in March 2000 when the Nasdaq surged above 5,000. Thirty-one months later in Oct. 2002, the index had fallen 78%. The S&P Nifty Fifty large-cap market darlings fell 48% during the 21-month bear market between Jan. 1973 and Dec. 1974, while the Nikkei collapse that lasted 31 months and started at the beginning of 1990 saw a 63% decline. Finally, the Great Crash that began in Sept. 1929 led to an 89% decline in 34 months.

Mr. Hanson said:

We are in the 14th month of the current bear market, and the S&P is down 52% at the November lows. While one might begin to argue that enough points have been lost, it is very difficult to argue that enough time has elapsed to complete the cycle.

He concluded that the pending rally will likely be just another recovery within an ongoing bear market. The analyst’s best-case scenario calls for the market to hold near recent lows and trade in a highly volatile range for the next few intermediate cycles. The more bearish option would see the market rally sharply into the middle of the first quarter of 2009 but then trend lower. In this scenario, below recent lows, Mr. Hanson said the next major support level for the S&P is near 605.

Comments

[herbert hoover:]

"The stage is set for an intermediate rally, and the upside percentages can be large, Mr. Hanson told clients, noting that the first level of resistance for the TSX is near 10,200, and then the 40-week average near 12,000. For the S&P, intermediate resistance is between 1,007 and 1,044, while the 200-day average is near 1,230."

Is this guy serious?

2008 Dec 04 02:55 PM

[kianator:]

to all,

just follow the 10 month exponential moving avg (EMA) on the S&P 500 Monthly chart (200 day on Daily, 40 weekly charts) to help decide when the market has turned from a bear to bull market. when you get a monthly closes above 10 ema monthly, then that is a very relilable signal that the market has gone from bear to bull. monthly charts weed out the daily noise you have in the markets and provide you with the big picture of whether you are in a bull or bear market.

based on previous down cycles in the market, it just doesn't happen right away no matter how much the S&P has lost this year. HOWEVER, we are so oversold on the all long-term charts that the "mother of all over-sold bear market rallies" is entirely possible up to the longer-term moving avgs.

tomorrow's job reports will give you a good clue on whether the intermediate trend is about to change for the next few months. the market has been pricing in bad news since the Nov 21st DOW lost of 7450.

2008 Dec 04 04:58 PM

[mcadoo3312:]

He is right about those levels - just not their positioning. There are too many other levels of resistance before that to have any confidence in what he is saying. Hell, we failed a number of them today.

2008 Dec 04 05:46 PM

[rber:]

Charts are but only one of the tools that should be in your toolbox. They're only as good as the history that made them, well, history. My intuition tells me that the "mother of all oversold bear market rallys" won't occur until Mr. Obama and Co. announce stimulus part II as there is absolutly nothing else in the offing but more pain & misery. Besides, based on what, besides your chart are we oversold?

2008 Dec 04 07:41 PM

[sf94127:]

The market is totally dysfunctional and the only rational approach is day-to-day assessment. Unless your time horizon is > 2 years and arguably 5, only trade day to day and stay is cash. That is what I am doing.

2008 Dec 04 07:52 PM

[Moon Kil Woong:]

In a recession you should be more concerned about keeping your money than making it because as dollars dissapear in deleveraging, even if there is no overt deflation, it is obvious that the net effect is they are worth more due to scarcity. That's why the government bailout is great for banks and terrible for citizens. This is not because they get free money or taxpayers pay for it as much as when they get more money to keep their money they end up owning a higher percentage of total money and subsequently more of the US economy. Thus, they are the real winners of the downturn and all others are its loser.

2008 Dec 05 02:01 AM

[Urbane Gori...:]

Re: Will Expected Rally Be Part Bear or Bull?

Yes it will! jegan

2008 Dec 05 10:26 PM