The Beginning of a New Bull Market? 17 comments
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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
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.
- (+) The market closed above support around 868.
- (+) There was higher volume on up market days.
- (+) The market is 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
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 has been when looking back.
Source:
- "Happy New Year" May Be True In 2009!, Excerpt from Schwab Investing Insight, By: Liz AnnSonders, Chief Investment Strategist, January 2009.
Disclosure: Long SCHW.
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This article has 17 comments:
Market bottoms are reached through a process in which the first low is tested in some manner...........usual... two times. The lowest of the lows is usually reached on light volume, not the type of volume we saw on on November 20. Markets tend to bottom through exhaustion, not panic.
The market is forward looking but what is it looking forward to? Economists and others are now beginning to believe that the economy and corpoate earnings may deteriorate through 2009 and turn around sometime in early 2010.
Using six months as a lead time, this places the earliest recovery in the third quarter. I am trying trying to make a point more than I am a forecast.
Trading stocks is not investing. If you buy something you are not willing to hold for a three year period you might spend your time, and have more fun, in Vegas because Wall Street is rigged against the majority of traders. Where are all those day traders in 1999 who were all over CNBC and followed by the real estate flippers of 2004-2005? Driving cab?
The "stock market" is not investing. Buying stocks and holding them as their corporate value increases or selling when it appears to be slowing is investing. An investor must have adequate liquidity to handle bad markets. Better still, realistic to sell into manias and buy in panics.
You may trust your broker but don't trust your brokerage firm. The harder they sell an investment idea the worse it is. Fifty years as a professional investor taught me that decades ago and it could never be more relevant than during manias.
"The "stock market" is not investing. Buying stocks and holding them as their corporate value increases or selling when it appears to be slowing is investing. An investor must have adequate liquidity to handle bad markets. Better still, realistic to sell into manias and buy in panics. "
I agree with his thesis, but would substitute the word "price" for his word "value". Then you could avoid the bear markets. To a value investor, lower prices means more value, thus more buying.
When "price" is increasing (along with earnings, etc), it is time to buy. When "price" is decreasing (by some pre-determined amount or %), it is time to sell. There are other fish in the sea.
the run up from the 2003 low was the longest suckers rally in history...
traders will trade and will,if they're good, make money in bull and bear...
investors need to know a suckers rally from a bull market...
i see rallies...i see a down trend...i'm ok with water falls...
but a real bull market?...no
As I write this, the Dow is down 2.9%.
Think more like if they say 6 months it will be at least a year, maybe two.
What fools we all are, start doing your own thinking, These people have no more idea than you and I on where & when it's best to INVEST. Most of these are in the business of commissions and they will attempt anything for their self betterment.
Just use you common sense and you might be surprized how many good judgement you might make.
These other people are nuts.
Here's my two cents worth: who cares if we're at the end of the bear market?
The answer to that question depends on whether you are one of two types of people. Type number 1 seeks to buy shares of good companies as cheaply as possible, and ride the earnings growth for as long as possible. If you are type number 1, it doesn't matter if stock gets cheaper after you buy it. All you need to know is that it is cheap when you buy it, and if it gets cheaper (and if you still have any cash left) you buy more. What you care about is investing in companies, not trading strategies.
Type number 2 people are simply interested in generating returns on their capital. These are people who, in effect, are more interested in investing in their own ability to run money. It doesn't matter to a type 2 person whether he invests in commodities, stocks, real estate, bonds, and whether any of the above are cheap or expensive. Wherever there's an opportunity to trade, type 2 people move in. If you are a type 2 person, you certainly care whether we are at the end of the bear market or not, because that will have a huge impact on how you invest.
Before you ask "are we at the end of the bear market" ask yourself this: are you a type 1 or type 2 person.
On Jan 14 08:06 AM CautiousInvestor wrote:
> Two points.
>
> Market bottoms are reached through a process in which the first low
> is tested in some manner...........usual... two times. The lowest
> of the lows is usually reached on light volume, not the type of volume
> we saw on on November 20. Markets tend to bottom through exhaustion,
> not panic.
>
> The market is forward looking but what is it looking forward to?
> Economists and others are now beginning to believe that the economy
> and corpoate earnings may deteriorate through 2009 and turn around
> sometime in early 2010.
>
> Using six months as a lead time, this places the earliest recovery
> in the third quarter. I am trying trying to make a point more than
> I am a forecast.
>
So, If you have the money to spend, wouldn't buying heavily from now until to beginning of the "Bull" allow you to purchase stocks at a deep discount?