The current bear market has caught many investors flat-footed as they sense that this time it just might be "different". The only thing "different" about this bear market is the "rarity of its severity". We just might be witnessing a development in the reversal of a secular trend. If so, then further correction may occur and it is prudent to at least be proactively aware of the potential downside risks.
To gain a sober perspective, let us step back in time and note that the most recent secular bull market trend may have started on 10/9/74 and ended on 10/19/07 in which the S&P 500 advanced +2112.67%. A bearish retracement of such a move would implicate an Armageddon-like scenario of blood on the street (i.e. Wall Street) of biblical proportions. However, we will be generously less pessimistic in our assessment and start at the point where the S&P 500 bottomed in August and September of 1982 and then broke above its 50 month moving average to advance for a +1296.26% return.
Now, I am not trying to scare anyone into abandoning equities as a wealth creating vehicle, but I will emphasize the necessity of skillful stock selection. For the sake of example and to prove that I am not all doom and gloom, while the S&P 500 contracted -23% from January 1981 through August 1982, more than 60 stocks that currently represent the Russell 1000 index advanced 10% or more during the same period. Some standouts were HANS (+344.55%); CLF (205.16%); RHT (+113.17%); SYMC (98.11%); and CEDC (83.15%). I only mention this to demonstrate that some bulls do survive and thrive in bear markets. In fact, our database can document many examples of such in various bear markets, but that is not the primary purpose of this report. Shall we move forward?
In the fog of war, a cool head prevails. At Hillbent, I try to call it like I see it, but am not afraid to make contrarian calls in either bull or bear markets. Like life itself, the market is full of contradictions that challenge the status-quo. This current bear market is one particularly nasty and bloody war, but I am confident that solid trend and fundamental analysis will prevail against the odds for our readers who remain Hillbent on the Market Direction.
Where was I? Ah yes, returning to the August 1982 through September 2000 bull run. (Sometimes a good Napa merlot on a rainy southern California night up in the mountains with a warm burning fire can lead one astray from the matter at hand. Please pardon the indulgence.) After this point, the S&P 500 fell victim to the tech wreck and corrected -42.97% from 9/12/200 through 2/19/2003. During such a move, the index once again violated its 50 month moving average. It is this secular period with which I am most concerned. After the completion of the last bear market cycle, the S&P 500 index resumed its secular uptrend from 2/10/03 to 10/19/2007 for another +77.56% of upside appreciation. Since 10/19/2007 through 2/20/2009, it has corrected -48.68%, which is where we are right now.
Most pressing is where we go from here. The market dances to its own beat and appears fixated on the limbo (i.e. how low can we go?). In the big picture since August 1982, the S&P 500 remains up +625.50% despite the current bear market. Yet, this wipes out about 50% of the gains in this secular bull market cycle. As mentioned above, it is this secular bull trend-cycle with which I am concerned. Presently, the market is finding support at the October 2002 and March 2003 respective bottoms of 768.63 and 788.90. However, while the market is trading below its 50 month moving average, one alarming difference is the fact that it is also trading below its 200 month moving average. This is not an omen to be ignored.
In applying some of my most reliable technical analysis techniques to the long-term market direction, I prefer to use monthly pivot point values. The monthly chart below shows that whenever pivot point values cross above or below their 13 month exponential moving average, the sustainability of the market direction trend can be quite extended. Unlike month end closing prices, pivot points reflect the average sum of high, low, and closing prices to identify key support levels which are widely followed by prop traders and big money institutions. Closing prices can fluctuate upward or downward on a monthly basis, but pivot point support levels tend to be less volatile in their market direction movement and, therefore, a reliable trend indicator.
Price-Volume analysis also discloses that trading on the S&P 500 exhibits the most bearish relationship, i.e. falling prices and falling volume. Conventional wisdom says that falling prices on falling volume is a good sign in that there are fewer sellers. Professionals know that nothing could be further from the truth. Falling prices on declining volume reflects apathy in the market and prices tend to fall on their own weight. Due to the absence of buyers, it does not take as many sellers to push down prices. Some may scratch their heads and disagree with this rationale, but I beg to differ.
Employing Fibonacci analysis, the S&P 500 has already violated its 50% retracement support level at 838 and looks headed for a full 61.2% retracement to about 665, give or take 20 or 30 points. Incidentally, for the majority of 1996, the market traded between the ranges of 600 to 700 and this marks the next plausible band of support that may see a retest. Mathematically, a 700 level represents another -10% haircut for the value of the index. If you can live with this, then fine. If not, you have been fairly warned and may want to take whatever necessary steps to protect your portfolio or nest egg. Based upon the information I have already provided, I will allow readers the privilege of calculating additional downside percentages.
Although not illustrated in the chart below, the next significant band of support centers around prices ranging from 450 to 500 during the August 1993 to January 1995 period. God forbid that we should test these levels and I’ll stop here since there is no point in ruining the experience of a good Merlot on a rainy southern California night with a warm fire. As the current bear market is a rarity, so is tonight’s atmospheric conditions and fine red wine.
Here's a toast to holding key monthly support levels and being prepared if not…
Monthly Chart of S&P 500 (as of Feb-20-2009)
Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.
