Worst of Selling May Be Done, But Bear Market Far from Over

By Dr. Declan Fallon

Last week I took a look at historical performance of the S&P as it pertained to volume. Today I will look at the position of the S&P relative to the major moving averages (20-day, 50-day and 200-day MA). In a similar vein, Brett Steenbarger had a look at the past two days action and noted a bullish bias five days out.

For this analysis I based on last week's standings to keep a degree of continuity. On June 8th the S&P finished 3% above it 20-day MA, 7% above its 50-day MA and 2% above its 200-day MA. The closest match was October 12th 1970 when the S&P was 1% above its 20-day MA, 4% above its 50-day MA and 2% above its 200-day MA. What followed was a sideways period which lasted just over month before it rallied for another 6 months.

click to enlarge

Other matches were September 4th 1992 (0%/0%/2%) which experienced a 5% trim over a month then rallied for the next 18 months.


August 31st 1984 (1%/6%/5%) which evolved into a 4-month sideways consolidation before the rally continued:


August 29th 2003 (2%/2%/10%) where the S&P broke through a summer consolidation in the early part of the most recent cyclical bull market.


August 5th 1988 (1%/1%/5%). Unlike prior examples this was a little more scrappy but was still part of a larger rally (i.e. no meltdown followed):


11th October 1978 (2%/1%/10%). The first example not to show a rally to new highs, but no major low either and the prelude for April through to October was not what we have seen:


March 30th 1981 (1%/3%/5%). A step beyond above where the lead in was not well matched given the sequence of lower highs. This was the only example to follow with a new 52-week low.


Jul 21st 1952 (0%/2%/5%). The last example has the look of what may be expected over the coming months - the fact it was in July is coincidental. If the S&P was to move towards a head-and-shoulder reversal we would need to see a substantial correction this summer similar to what played out in 1952. In the current case the S&P would go from 912 down to the 800s (a 13% drop). From there, if it followed the 1952 case there would be an October bottom and a rally to new 52-week highs - although the markets foundered for most of 1953 with the summer of 1954 marking the beginning of the next bull rally.


No one knows what will happen in the future. The good news is from an historical standpoint a significant meltdown to match what has gone before is unlikely to occur. But it is also reasonable to assume we won't be seeing any great push higher anytime soon.


The worst of the selling may be behind us but the cyclical bear market is far from over yet.

Comments

[Tony Petroski:]

Fascinating analysis Doctor.

Jun 17 11:45 AM

[Jake2:]

Your're talking about the S&P 500, right? Not ROW. Best to have a bit of ROW on aboard, or are you negative (relatively) on that, too?

Jun 17 11:46 AM

[Larry House:]

All well and good unless it is different this time. Useful data.

Jun 17 11:52 AM

[TurtleTrader72:]

A Technical Perspective:

Fibonnacci retracement studies applied to the weekly S&P 500 chart indicate that this latest correction could eventually pull the index down towards the low 800s and possibly lower. The first retracement level of 38.2% posted at 845, the second 50.0% level at 811, and the third 61.8% at 777. I believe that this correction could be the process in which we form the second shoulder of a intermediate term inverse head and shoulder formation. If that is the case, i would look to be a buyer at around the 800 level on the S&P 500. From there (if my theory is correct) we could experience a rally that could take the index from about 800 all the way to 1100. I base the 1100 mark by using a 'gap trading' strategy where i would expect the 'down gap' (in the weekly bar charts) on SPY to get filled in at that level. If we use a 'relative strength theory' it will be technology shares that will likely lead the next intermediate bull run. In the meantime, lets see if the latest weakness in the market will provide us with the second shoulder formation i am looking for.

Jun 17 12:05 PM

[ron_paulite:]

DOW 5000 and S&P 600 are still possible within these 2 years!

Jun 17 12:05 PM

[Fighting Yoda:]

After the greatest rise ever, a mere 3% drop and the worst of selling is done? Hmm

Jun 17 12:47 PM

[Mad Hedge F...:]

Fasten your seatbelt. It looks like the worm has finally turned. Hedge funds that rushed headlong into piling on new risk positions as recently as last Friday are now unwinding them today just as fast. All last week the smart money was selling to the late comers, newbies, and wanabees. The Viagra is starting to wear off. It’s time to take short term trading profits on crude (USO), commodities (DJP), all stocks (SPX), emerging markets (EEM), short Treasury bonds (TBT), all currencies (FXE), and junk bonds (JNK, HYG). I love all these things long term, but suffer from a short term tolerance for paid. When the best case scenario is sideways, I’m outa there. Look for decent bounces in risk reducing positions like the dollar ($USD), short dated Treasury securities (CSJ), and defensive sectors like utilities (IDU). It has been obvious to me that all of the good, long term holds were rolling over on shrinking volumes right at 50 or 200 day moving averages, since last month (see “Sell in May and Go Away” at madhedgefundtrader.com...).

Jun 17 02:01 PM

[KIT:]

aldn.net/lattis-sharlo...

A little more graising on the green shoots to come. ( hope you like the picture )


On Jun 17 12:47 PM Fighting Yoda wrote:

> After the greatest rise ever, a mere 3% drop and the worst of selling
> is done? Hmm

Jun 17 04:08 PM

[Fighting Yoda:]

I prefer Salmon to grass, thx


On Jun 17 04:08 PM KIT wrote:

> aldn.net/lattis-sharlo...
>
>
> A little more graising on the green shoots to come. ( hope you like
> the picture )

Jun 17 08:56 PM

[Tomcat101:]

Interesting history lesson. This ain't 1970 though. It most definitely ain't 2003.

The green shoots are poison ivy, briars, and chigger weeds. Maybe a few dandelions. Nothing you'd really want in your yard.

Jun 17 09:30 PM

[lex:]

No. its 1929...check out the Dow chart between 1929 and 1932.

Then Now
Peak 3/sep/29 Dow 381 9/oct/07 Dow 14164
Post Crash Lows 13/nov/29 Dow 201 6/mar/08 Dow 6626
(47%) from peak (53%) from peak
Bear rally 17/apr/30 Dow 294 12/jun/09 Dow 8799
155days +46% from low 98days + 33% from low
More lows 31/dec/30 Dow 165 31/dec/09 Dow 5138?
31 /dec/31 Dow 78 31/dec/10 Dow 2584?
Real bottom 7/jul/32 Dow 42 31/Dec/2011 Dow 1558??

Jun 18 04:08 AM