A Cyclical Bull Market
The current cyclical Bull Market, within the present secular Bear Market, does not show the strength to overcome the current levels. Indeed, the exceedingly durable resistance in the region of 1565 in the S&P 500 Index (SPY) represents the threshold that has buoyed the market since 2000. As the market looks very stretched and exhausted in all likelihood a trend reversal is in progress. The chart below shows this situation, most notably the mentioned barrier that contained prices in both 2000 and 2007.
Charts courtesy of StockCharts.com
The chart clearly shows the previous secular Bull Market, between 1982 and 2000, as well as the current secular Bear Market which began in 2000 and has not yet finished.
To better define the issue, I present below a simple framework on Secular Bear Markets. We should bear in mind that it is the evolution of the world economy and all its fundamentals that determine the length and direction of long-term markets.
It is essential to mention the sequence of cyclical developments in the latter period as follows:
Cyclical Bear Market - 2000-2003
Cyclical Bull Market - 2003-2007
Cyclical Bear Market - 2007-2009
Cyclical Bull Market - 2009 - ?
It will not be too bold to say that the state of the current global economy is the worst since the Great Depression. In terms of prior consideration, we can see that the markets are not in a position to initiate a continued and strong ascent as it is characteristic of a bull market. The reasons are clear: first, the prices are already unusually high and have reached a strong resistance mentioned above. Then, the investor sentiment has given repeated indications of being in the latter stages of a cyclical bull market, not in the beginning of one. In fact, there are presently 81% bulls and a solid complacency is near 2007 levels.
Thus, we have the following important fundamental signals:
- Recession - Lack of growth or even recession are continuous problems in many developed countries, mainly in Japan and the European Union.
- Real Inflation - The US money supply known as money of zero maturity (MZM) has increased enormously. As it is most likely an accurate measure of future inflation rate, present monetary expansion may lead to annual rates of more than 8%. This is troubling because it will bring interest rates up soon.
- Liquidity bubble - Monetary expansion, monetizing debt and quantitative easing are expressions that define an ongoing US policy that has the terrible ability of producing all kinds of future economic problems. It seems to have been created a foundation for future crisis without addressing current issues. Similar examples such as Japan gave poor results.
- High budget deficits - Many developed countries spend much more than they earn. In recent years, the United States has been a record breaker in this dangerous practice.
What about SPY?
Launched in 1993, the SPY seeks to provide investment results that generally correspond to the price performance of the S&P 500 Index. To support my thesis in this article, it is necessary to explain why SPY managed to exceed their maximums of 2000 and 2007. Honestly, I must say that this justification is not easy. I prefer to say that the evolution of SPY should be consistent with the Index and, at this time, warning signals are crucial.
Specifically, there are the following facts:
1. The main indicators are either negative or weakening or even giving a sell signal.
2. Since a few weeks ago, there has been a clear negative divergence between RSI, MACD and prices. While prices have risen those indicators have fallen.
3. In recent days a "lower low" took place, but a confirmation is needed.
Thus, a top might have been found at 153.28, provided that the above indicated items will be confirmed. At present and for quite some time, values of SPY have been exactly 10% of the S&P 500 which is a very curious fact. This situation did not occur at the beginning and, for example, the value of SPY in 2000 was much smaller than those 10%. Perhaps this is a good explanation for its different behavior over time, and especially regarding resistances.
The high levels of complacency and the percentage of bulls are typical of the final stage of a long ascending trend line. The conditions are created for a strong trend reversal as this cyclical bull market that has begun in March 2009 has managed to rise 130% until now. So far, it has lasted for 47 months. Both its duration and magnitude imply that this intermediate cyclical bull market may be complete. Seemingly, it is ready to draw to a close, giving room for an obvious reversal and a new cyclical bear market.