New Bullish Signals Emerge

The transition from a bear market to a bull market is just that: a transition. Transitions take time and are not binary events like turning a light on or off. Transitions in any market can be frustrating and stressful, but if we continue to focus on the most important and telling indicators, the market should get us pointed in the right direction and aligned with the primary trends.

While there are numerous signs which can indicate the possible transition from a bear market to a bull market, the following two milestones are of uppermost importance:

• When the 50-day moving average crosses, and more importantly holds above, the 200-day moving average
• When the slope of the 200-day moving average turns positive
  

During an established bull market, a good way to eliminate less attractive markets or investment alternatives is to discard those that have a negatively sloped 200-day moving average.

At the end of a bear market, it takes time for a market to send signals of the potential staying power of a rally via a positive change in the slope of a 200-day moving average.

As shown in the chart below, even though stocks began to bottom in mass in March of this year, we only started to see positive changes in the slopes of 200-day moving averages in the last two weeks.

click images to enlarge

The significance of the slope of the 200-day moving average can be shown via the three charts below. The 200-day moving averages are shown in red.

As we have stated in the past, in a bull market:

• Price tends to stay above the 200-day moving average (MA) (red line).
• The 50-day moving average (blue line) tends to stay above the 200-day moving average.

In a bear market, where conviction is lacking to push prices higher:

• Price (black line) tends to stay below the 200-day moving average.
• The 50-day moving average tends to stay below the 200-day moving average.

The table shown below allows you to visualize the transition that has taken place between March 1, 2009 and August 2, 2009. In March (far left side of the table), most markets had the characteristics of a bear market.

Currently (right side of table), numerous markets look much more like an early bull market than an on-going bear market.

The Dollar’s Move Supports Inflation-Friendly Assets

Notice on the left side of the chart above, the U.S. Dollar had bullish characteristics as investors looked for relatively safe havens and avoided risk. The chart below illustrates the possible on-going reversal of this trend.

The charts below show bullish moves related to the slope of 200-day moving averages (shown in red).

While we are not expecting the current bull market to last as long as the 2003-2007 bull market, it is not unrealistic to believe that markets could run further in 2009 after the slopes of their 200-day moving averages have turned up. The purpose the chart below is to suggest further gains may be possible, not to suggest the magnitude of the potential gains during the balance of 2009 and beyond.

Obviously, conditions in 2003 were different from current conditions, but the basic concepts of the transition from a bear market to a bull market still apply in 2009.

The chart below can help us overcome the fear of the current bull having little room to potentially run from current levels.

S&P 500’s Recent Retest Is Very Important to Bullish Case

The S&P 500’s correction between mid-June and early July and subsequent highs were important steps in the possible transition from a bear market to a bull market.

The Bears Can Make A Strong Case Just As They Could In 2003

Even in the most bullish of economic and financial market conditions, it is easy to find bearish commentary and bearish forecasts. Therefore, it is not surprising that in 2009 it is easy to find support for the bearish case. We understand and respect the bearish case. However, the market is currently aligned with the bullish case.

To illustrate the possible pitfalls of being overly reliant on bearish commentary and any forecast, we present the following bearish commentary and arguments from a balanced USA Today article, Many wonder if this stock market rally is sustainable (May 8, 2003).

As you read the comments below, keep in mind the S&P 500 stood at 927 when its 200-day moving average turned up in May of 2003 (and when the comments below were published). The new bull market that began in 2003 did not end until the S&P 500 reached 1,565 in 2007. After the bearish commentary below was published in 2003, the S&P 500 gained roughly 70%.

But for every potential positive, there is an offsetting worry. Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray notes that betting on an economic recovery has been a losing strategy. And with analysts still expecting double-digit profit growth in the second half of the year, and still no concrete signs of a full-fledged economic recovery, the likelihood of the rally fizzling is high. "It's unlikely the market can sustain the type of run it's on," Belski says. "The major upside move is over," at least for now.

There are other bugaboos lurking that could short-circuit the rally. One big potential negative is if the economy falls into a deflationary spiral. On Tuesday, the Federal Reserve said they could not rule that out, although they say the risk remains small. Deflation is a profit killer. "In a deflationary cycle," says Al Schwartz, an analyst at Schaeffer's Investment Research, "businesses have no pricing power, (and) consumers are hesitant to spend because they know prices will be cheaper tomorrow." The result is that companies fail to hire workers, setting in motion a painful economic spiral. Burdensome debt loads become too much for people to handle, so they sell assets such as stocks and real estate to meet the payments. That, in turn, causes a tumble in prices of stocks, bonds, real estate and other assets.

Hochberg of Elliott Wave also says this is just another bear market rally. He won't deny it's been a good rally the past few weeks. But the key words are "has been," he notes. His firm has studied every financial mania, from the tulip bulb craze in the 1600s to the 1929 U.S. stock crash to the Japanese implosion that began in the late 1980s. The key finding: "All manias have one thing in common: They all slide back below their starting point." If the 1990s tech bubble follows the same pattern, there is more pain ahead.

John Bollinger of Bollinger Capital Management calls this "the giant sideways." If that is the case, investors who want to make money must get out of stocks during rallies and get back in during slumps.

We should point out that USA Today also presented the bullish case for their readers in 2003. Despite the bearish commentary and analysis above, the market did not go down, nor did it go sideways; it went up further than most could have imagined in May of 2003.

In 2009, the market is sending numerous bullish signals that compare favorably with the end of a bear market and the beginning of a new bull market. As long as the bullish signals remain in place, it is prudent to pay attention to them. If the market deteriorates and the signals migrate back to a bearish stance, we must be open-minded enough to accept the possibility of the return of the bear.

These comments, taken from a portion of an update for CCM clients, may not pertain to or be appropriate for many investors based on their risk tolerance and situation. They are presented for educational purposes only.

Disclosure: The author and CCM clients have numerous positions, including exposure to U.S. tech stocks, foreign currencies (long and short), emerging market stocks, foreign bonds, and commodities.

Comments

[RiskReturnO...:]

Great article. For the more conservative investors, to really confirm bull market, you can wait for 50 day EMA to cross 200 day EMA, and positive sloping 200 day EMA ... the risk-adjusted return is more attractive as you have fewer "false positives" ...

Aug 03 10:34 AM

[samretlew:]

I have been in the market using broad based index funds and a few emerging markets ETFs since the middle of March. My guide consists of moving averages, specifically the 50, 125, and 200 EMA. If an investor uses a shorter moving average, the chances of being whipsawed are, of course, greater. However, with greater risks, there are potentially greater profits, which has been my experience in the rally. Once the 50 held, I started to focus on the 125, and next was the 200. And now, there is the golden cross. There are a lot of bears out there crying about manipulation. The have lost a lot of money by not participating. Eventually, their ranks will break, and ironically, they will be adding to what they perceive as a manipulated upward trending market. Trying to make predictions concerning the length of the current uptrend is futile. I'm neither a bear nor bull but a trend follower. Thanks for the article. Enjoyed reading it.

Aug 03 05:34 PM

[Per:]

This is just a very strong bear market rally. We are still in a secular and cyclical bear market with another leg down soon to start. Markets are fundamentally overvalued and technically overbought.

Aug 03 05:45 PM

[Chris Ciovacco:]

For the record, below are dated excerpts from articles posted on Seeking Alpha. The reader can decide for themselves if our research has represented both the bullish and bearish side of the ledger in the past. Some of the bearish excerpts below could have proved valuable to many investors.

The comments below from a February 2008 (not 2009) article are far from pumping any market.

Technical Breakdowns May Call For More Hedging: Based on recent technical breakdowns in many risk-based investments (see Graph 1), the probability of investors incurring additional losses over an extended period of time has increased. Both the technical and fundamental outlook now favors bearish outcomes over bullish outcomes. In addition to the cash we have raised in recent months, it is now prudent to prepare for the possibility of adding additional hedging vehicles to our portfolios. While favorable outcomes are still possible, they are no longer probable.
Full article posted on 2-13-2008:
seekingalpha.com/artic...

This article was from March 27, 2008:
Market Still Unattractive - Not Much Has Changed: You do not need to be a Certified Market Technician to see that financial stocks remain firmly in a downtrend. The best time to invest is when you have both positive fundamentals and positive market action (or technicals/charts). It is very difficult to say the charts look good (yet), and nearly impossible to say the fundamentals look good. There is not enough evidence in either the fundamentals or the technicals to put significant amounts of capital at risk in stocks.
Full Article:
seekingalpha.com/artic...

The text below from a July 28, 2008 article was written months before the height of the credit crisis:

Risk Management in Trending Markets: While financial stocks have hit a violent intermediate bottom and could rally for a while longer the odds favor lower lows in the months ahead as housing prices continue to decline. The chart below illustrates the structural nature of the problems facing the housing and financial industry. There are fundamental reasons financial stocks have been hit so hard, reasons which go way beyond short selling. Additional bank failures in the coming months would not come as a surprise, which is supported by the rapid deterioration of the sector. Since our economy has become so dependent on the availability and use of credit, these problems will continue to impact U.S. and global growth.

Full article:
seekingalpha.com/artic...

This from August 31, 2008:
Thursday's Stock Rally Means Little to Trends: Similarly, the 1.00% move to the upside in foreign stocks as of Thursday morning has no impact on the primary trend, which remains down. Financial stocks, shown below, could move quite a bit higher without doing any damage to the primary trend, which remains firmly down. Commercial real estate (below) has done nothing yet to indicate any basis for optimism. The bond market is not forecasting better times ahead.
Full article:
seekingalpha.com/artic...

This from February 12, 2009 a few weeks before the markets made their lowest lows:
Market Base: Not Necessarily Bullish: The primary trend in stocks remains down, which means the odds favor lower lows after this base. If we were in a bull market, odds would favor higher highs after a base. We are not in a bull market.
seekingalpha.com/artic...

Aug 03 06:48 PM

[Chris Ciovacco:]

Please see my response posted on this page.


On Aug 03 05:46 PM Archman Investor wrote:

> Rah Rah Siss Boom Bah!!!
> Chris Ciovacco, Chris Ciovacco,
> Rah Rah Rah.
>
> Way to go. Asset gathers doing "repeat" articles with updated charts
> in a further attempt to "lure" and "excite" mom and pop investors
> to jump into the market after a 45% run.
>
> Almost 95% of companies earnings were from asset sales, layoffs,
> and every other cost cutting measure under the sun. Revenue at most
> companies was down 30% YOY.
> Unemployment continues to go up.
> The dollar continues to get destroyed.
> Debts are still being defaulted on at an alarming rate.
>
> What you have here is an "asset gatherer" pumping the market in whatever
> way he can so they can keep collecting assets and gathering fees,
> regardless of how much money people end up losing.
>
> I bought back at S & P 680 where people "should" have been buying
> stocks, not 48% higher in a market dominated by terrible earnings,
> media hype, taxpayer money masquerading as "bank profits".
>
> When the powers that be decide enough has been made on the upside
> and its time for the serious downside, you can bet your bottom dollar
> that asset gatherers like Mr. Ciovacco are still going to be wealthy
> after the damage has been done VS mom and pop americans who are going
> to be sitting around wondering WTF happened to their money.

Aug 03 06:52 PM

[DaveW:]

Human nature and psychology desires hope and to end suffering as soon as possible - there is no more powerful herd effect than near a top to a bear market rally. All hope that it's a bull market and fear they are missing it, all want the suffering to be over. But consider, 1.) how low the 2Q earnings bar was set; 2.) how much higher the bar has been set for Q3; 3.) how 'real' unemployment is at least in the mid-teens, and rising (don't forget those whose benefits have expired...); 4.) how consumption has been obliterated and showing no signs of recovery; 5.) how prime loans defaults are increasing; 6.) how unprecedented $Trillions were thrown at this mess; and on, and on and on...
I know, it's like a buzz-kill calling the cops on a great party, no one wants it to end. But, end it will. Fundamentals (the cops) show up and bust this party this Fall...

Aug 03 07:00 PM

[Archman Inv...:]

Chris:

The bottom line is this:

You buy stocks when nobody wants them and when everybody wants them you say:
"Here, take mine."

Average mom and pop Americans are going to get destroyed when this market corrects.

The comments, articles and their links you provided were from 2008, when I was talking about 2009.

Here is your article from March 2009:
seekingalpha.com/artic...
April 1, 2009
seekingalpha.com/artic...
April 8, 2009
seekingalpha.com/artic...

When fear was the greatest you yourself were not recommending stocks. Now that the market is up 45% from then low, you are now bullish as all get out.

This is why the asset gathering business is flawed. As a professional in this field you should have been buying when other were selling, buying when the likes of CNBC were finally telling people to sell at S & P 680 after they kept telling people to buy the entire way down. Now I understand that your clients may vary in age, investment tolerance, etc, however for those under 50 who need a retirement that does not include working at Wal-Mart, I would think people should have been buying stocks (maybe not hand over fist) under S & P 700.

The following from my above post are 100% true:
<<Almost 95% of companies earnings were from asset sales, layoffs, and every other cost cutting measure under the sun. Revenue at most companies was down 30% YOY.
Unemployment continues to go up.
The dollar continues to get destroyed.
Debts are still being defaulted on at an alarming rate>>

Yes, these markets are going higher simply because there are those who want the market to go higher.
However, when the time comes that those "powers that be" decide that the markets are to go lower, then those average americans getting in now are going to once again get their heads handed to them.

Chris, I am not in the investment business nor would I ever claim to be smarter than anyone around here, especially those who do this for a living. However I always ask myself, as a non professional manager of my own money, why is it that as of today the value of my self managed portfolio of stocks is about where it was back in early 2008, while the average Americans is at 1999 levels? Probably because I learned long ago, when to buy, when to sell, what to buy, and the "real" secret of investing:
The goal is to create "consistent", "sustainable", long term wealth creation over time.
Not chase performance or listen to those on TV or in print, who have no vested interest in my future regardless of how they appear to act.

Aug 03 07:14 PM

[RiskReturnO...:]

Are you suggesting short the SPY through SDS or another vehicle? or simply sell SPY to raise cash?


On Aug 03 06:03 PM Archman Investor wrote:

> As a follow up to my post above see this "pump monkey" article the
> author wrote only a few weeks ago using almost the same exact charts:
>
> seekingalpha.com/artic...
>
>
> The author has not been "wrong". No. But for average americans who
> are only "now" getting in the market or worse just starting to think
> about it: They do not need some asset gatherer getting them excited
> after a 45% run.
>
> Where was the author or other asset gatherers like him when the S
> &amp; P was at 700?? Why werent they pumping out articles everyday
> telling people to "buy when no one wants them?"

Aug 03 07:49 PM

[Jason Tillberg:]

5 month rally, up 45%.. it's done.

We should correct from here very shortly.

Aug 04 01:05 AM

[soulcharisma:]

i sold today dxo, uso, rig, oih, usg. for roughly $65000 U.S total after buying May 8th after missing the 35ish % run from Feb (i received an inheritance in may so couldnt enter the market any earlier)...i have done well on these from may 8th with a mini rollercoaster ride and may miss out on a few bucks, but profit taking and selling when you intend to sell originally is what the game is all about even though its so tempting so keep the stock as we hope it will keep rising. Sometimes you miss out on a few percentage points but profit taken is profit pocketed. I expect correction in the next month and will rebuy periodically across the downward slope or will exit the market and watch what happens in september. I am bullish short term on the fact that all the bulls are out trying to convince anyone who will listen that its the start of a bull market but fundamentals do not support this which will be revealed across September. In the meantime there's nothing wrong with enjoying the "trend" but remembering discipline is key in our present years market.

Aug 04 03:36 AM

[macmcf:]

With the S&P 500's P/E for Q2 running ~24 (partial reports), and bleak prospects for economic recovery in the next year, what can justify current prices, much less a continued run-up?

Aug 04 12:50 PM

[macmcf:]

BTW, if you are interested in following the P/E for the S&P 500, go to www.spglobal.com/ , click on "United States" in the left-hand column, then "S&P 500" under Major Indices, then on the Data tab click "Earnings". Finally, there will be a "click here" link to open an Excel file which includes current estimates. Good luck!


On Aug 04 12:50 PM macmcf wrote:

> With the S&amp;P 500's P/E for Q2 running ~24 (partial reports),
> and bleak prospects for economic recovery in the next year, what
> can justify current prices, much less a continued run-up?

Aug 04 01:29 PM

[H. T. Love:]

Thanks for the link. Fills some gaps I needed to fill.

HardToLove

Aug 06 08:39 AM