Cadbury Bid Indicates We're in a Stock Bull Market

The $17 billion hostile bid for Cadbury (CBY) should bring home the inherent underlying actual strength of this bull market as the bid signals that business is returning to normal. Today's bid by Kraft Foods (KFT) sent the Cadbury stock price soaring by more than 38% and clearly illustrates that multinationals are increasingly awakening from the credit crisis fear to taste greed at being able to pick up corporate giants such as Cadbury at rock bottom recession prices, even after a 38% one day price hike. Watch this space for many more mega bids to come as the bull market momentum continues to gather steam as we have a long, long way to go before we reach the merger and acquisition mania levels associated with bull market peaks.

Meanwhile, bull market deniers, in the face of overwhelming evidence of a bottom as evidenced by price trends, continue to cling to literally anything that leaves the door ajar towards revisiting the March lows and below. They are even resorting to delving back to the 1930's for any glimmer of hope. It should be obvious by now to everyone that transposing current price action onto a graph of the 1930's bear market makes it rather obvious that that is not going to happen.

One of my fundamental rules of analysis is that the further one deviates from the present, the more probable that one is going to be wrong, and the 1930's is more than just a deviation. At most I would go back perhaps a year to look for relative strength and weakness. But nearly 90 years? That era is long gone and buried and bears NO significance to the PRESENT! Yes we have echoes through time, but not that far back. For actual market impact events on today's markets, one needs to look at the peak in the housing markets and credit crisis events of the past two years where the three most notable events were:

1. Lehman's sparking of the financial collapse of September / October 2008.
2. Zero interest rates.
3. The implementation of quantitative easing.

They are the most important echoes from the recent past impacting on the present, rather than trying to match a chart from the 1930's to the present.

Is this a Bull Market or a Bear Market Rally?

My point of view is simple (it is good to keep it simple). Pick up any reputable technical analysis book and you will read that a bull market in stocks is confirmed when major stock indices (that's the DJIA) rally by 20% from the low (allowing for a few days of whipsaw). Similarly, a bear market is confirmed when stock indices fall by 20% from the high. Therefore, regardless of certain views that this is a bear market rally, the facts are clear that under the basis of technical analysis this rally has long since been confirmed as a bull market more than 30% ago!

The rules exist for a reason and that is for the investor / trader to recognise when he or she is wrong. Another reason is to arrive at a firm, tradeable conclusion.

However, the answer is NOT to change the rules, but to change your opinion! Being stubborn in the face of the trend is the surefire way towards financial oblivion. Yes those that clutch at contrary views will soon eventually have an opportunity to crow loudly, but the bottom line is to monetize on analysis through means of investing and trading, and in that regard making 15% on a plunge is pretty much meaningless against a 50% loss on the preceding rally. For me, the bull market remains intact as long as the DJIA steers clear of 20%+ declines. If such a decline were to occur, then the market is telling me what it wants to do rather than me telling the market what it should do!

Stock Bull Market Trend Update

The stock bull market continues to resolve towards the pattern I painted some 7 weeks ago - Vicious Stocks Stealth Bull Market Eats the Bears Alive!, What's Next?

CONCLUSION - My earlier fears about a bull trap appear to be unfounded. The stock chart indicates that we are in a stock bull market, and is suggestive of a trend higher towards a 2009 target of between 9750 and 10,000, with a high probability that we may get there before the end of October. Key danger areas for this scenario are a. for the trend line to contain corrections, and b. that 8080 MUST HOLD.

The last update of 3 weeks ago (Stocks Stealth Bull Market Crushes Bears Hopes Again) showed the trend resolving towards an earlier peak given the strength of wave 1, which implied weaker waves 3 and 5.

The Price action to date has shown relative strength against the forecast of a month ago. This suggests a higher target than the original 9750 to 10K before the end of October 2009, and the secondary stated target was 10,450. However it also suggests that the market may put in an earlier peak. I am still leaning towards the next correction AFTER the peak to be of greater significance than the last correction from June to July. Also, whilst my in depth economic analysis is on the UK economy, however much of the conclusions could equally be applied to other western economies. The analysis of February 2009 has been projecting towards a a double dip recession (updated June 09) which has negative implications for stocks during 2010, but for now don't be silly, don't fight the stock bull market (time to drop the word stealth).

Subsequent price action has continued to imply a scenario that resolves towards a 5 wave pattern, though this is now far too easy to interpret which therefore suggests a more complex pattern. The velocity of the uptrend is also in line with the original projection of 22nd July as indicated by the Blue Arrow, which continues to resolve towards a target juncture date of mid-October 2009.

The target for the termination of the current phase of the bull market rally was between 9750 and 10,000. As mentioned above, I am not expecting an easy ride for the fifth wave as clearly it is an obvious pattern to interpret following waves 1, 2, 3, and 4. What does this mean? Well, wave 3 is screaming weakness, so that suggest a weak push higher rather than something that resembles wave 1.

The MACD is also signaling serious price weakness as there is clear divergence taking place between the rising trend and a falling MACD, very similar to the June peak.

Two possible outcomes:

1. That the fifth puts in a lower peak than the wave 3, which is significantly more bearish.
2. That we get some sideways drift (possible false break lower) before a sharp rally for a higher fifth into the target zone.

Despite the increasingly bearish technical indicators, at this point I continue to march with the bull market and favour outcome b. ahead of a more serious correction that would first . target target the main support trendline and 2. 8900 Previous Peak.

Robert Prechter presents an alternative view for the 'bear' market in his latest 10 page newsletter, which can be downloaded for free here.

Trading Lesson From this Update - The further you deviate from the present in terms of analysis / trade scenario building, the greater the probability that you will be wrong. Therefore you MUST attach LESS importance to whatever you are looking at, particularly a chart of the Dow from the 1930's for EVEN IF it repeats it will be pure coincidence, as there CANNOT BE ANY ECHO from the events of that time into TODAY's Market. You are much better served by reacting to price movements in real time than getting sidelined by historic events or fundamentals.

Comments

[Observer45:]

really?

Sep 08 10:39 AM

[huangjin:]

The reason to look at 1930 is because human nature is the same and people behave in a similar way in similar circumstances. If we had charts of Roman or Egyptian market prices, they would be just as useful.

Sep 08 10:52 AM

[Joseph L. S...:]

We may or may not be in a bull market; only the silly certainty of hindsight will tell us which raving crowd of cheerleaders will have been correct.

But I doubt the Kraft bid for Cadbury is an indicator either way. The Kraft bid for Cadbury means that Kraft saw a chance to jump on an undervalued competitor at a time Kraft was flush with cash and Cadbury wasn't! It's easier to pursue a hostile bid when the other guy has disgruntled shareholders and little cash with which to fight back.

This bid is about corporate positioning in an attractive space, no more, no less. And I imagine if Cadbury mounts a sturdy enough defense to dissuade them, Kraft will set its sights on Hershey or some other smaller fish. This has always happened in tough times and I suspect it always will...

Sep 08 12:04 PM

[NUCLEAR1929:]

i never seen anybody who made money following the TA charts, but i have seen many who lost their shirts trading by the chart

Sep 08 12:26 PM

[AndrewBaker:]

The idea that a bid for Cadburys is anything to do with a bull market suggests to me that the author is living in a different place to the rest of us: Kraft are trying to buy an undervalued company for peanuts and the undervaluation is due to a bear market - with a big bounce right now - which has yet to drop further. Kraft are market timing, and in my view are wrong: wait for the drop that's coming and bid then. You bulls, take note. But, hey, who am I to tell greedy fearful investors who don't want to miss the boat, how they should invest?

Sep 08 04:09 PM

[thechaser:]

his analysis is not far from the truth;

the aug 14-17 dip and the sep 2-3 dip were courtesy of the masters of the universe

however, that the market flattened with strong resistance at first the 980 and then 1000 was testament to what the author is speaking about

i do think that the ruling elite or "da boyz" as David Fry calls them, will cause one more little drop down in an effort to reset Oct/Nov options and it makes sense for this to occur over the next week or 10 days;

but I agree with the author that no way are we going to see a real reset until after the next runup, after all, it was an engineered panic drop from the bear market Sep 08 level off of a panic runup Oct 07 peak;

that is what the Kraft bid is telling us; business is going to get back to whatever normal the tapped consumer can handle

however, there is still a lot of baggage to sort thru and that's why I believe that Feb 2010 will be revisit of this past Feb 09

Sep 08 04:45 PM

[roflmfao:]

oh great... Elliott wave... thanks for letting us know that you have no idea how to read a chart.

Sep 08 08:26 PM

[YoYoMama:]

Ridiculous reply from a spammer.


On Sep 08 12:26 PM NUCLEAR1929 wrote:

> i never seen anybody who made money following the TA charts, but
> i have seen many who lost their shirts trading by the chart

Sep 09 08:48 AM

[Cerenity:]

interesting chart analysis. thank you for the insight!

Sep 09 12:03 PM

[Daniel Harr...:]

Hostile interest on the part and pursuit of multi-nationals doesn't usually signal a full-blown bull market, since in that instance all prices are dramatically elevated. But it can signal the transition of a bear to bull market, so I'm partially (and mostly) in agreement. Great article, and it raises a really original and interesting point which no one else seems to have tacked onto.

Sep 09 12:31 PM

[Kevin_T:]

In addition to the technical, there is one big fundamental factor in favor of the stock run-up continuing for a while : The U.S. Government is printing and giving away vast amounts of money, borrowing costs are next to nothing. Foreign governments are doing similar. This is conducive to speculation, risk-taking and the forming of bubbles. The money being created and given must find a home somewhere, so I would not short this market. So far the payment of the bill seems many months in the future.

In the longer term, laws of economics demand the bill must be paid one way or another. Higher taxes? Inflation? Dollar devaluation? High interest rates? Probably all these and more. Also, consumer debt as percentage of disposable income is much higher than previous recessions and government debt as percentage of GDP is exploding, both of these will to be a further drag when the piper must be paid.

I am staying invested while the bubble re-inflates until I see the specter of higher taxes, rising interest rates and inflation dead ahead. Probably 6 months to a year. Then I am planning my escape, the party is really over.

Sep 09 12:33 PM

[Wayne A. Co...:]

How on earth does one company bidding on another confirm a bull market? All it proves is that Kraft wants to increase its market share. Does your logic assume then that no deals are consummated in bear markets?

Also - please educate yourself on Elliott Wave. In your final wave count toward your October target, you have Wave 3 as the shortest wave (unless wave 5 is truncated and finishes below the wave 3 high). If wave 3 - the meat of the impulse move - is the shortest your count is incorrect.

Sep 09 05:15 PM

[trick:]

The skeptic in me says that M&A such as this are in large due to companies with no real growth ahead of them in a benign economy trying to get some growth by acquisition. That makes sense from a directors point of view, grow the empire. However, from an investors point of view, is it the best use of your capital??

Sep 10 12:53 AM

[Moon Kil Woong:]

This is ridiculous. CBY is a UK company. So what is that saying? Everyone wants more overseas business, especially if you get to declare profit in a watered down US$. Indeed the recession may be over in Europe but not in the US.

As for the bull run, much of that is a lot to due with the dropping buck and the popping of the long term treasury market, not signals that the economy is going to grow like a weed. If that was the case then the rest of the stimulus about to hit in 2010 would lead to mass inflation. Instead, people will be wondering 6-9 month from now what the next rain of free money will come from.

The author is right, party when the market rises, even if it's due to money flows and not sound fundamentals. But really, be ready to run for the doors when the free money tide stops. A rising market doesn't always mean a return to good times. That's why the Great Depression is a good reminder that people were cheering about a market recovery right before the worst portion of the collapse hit.

That's how they get ya.

Sep 10 04:42 AM

[E Nuff Sed:]

I don't see any problem with the notion that this is a cyclical bull swing within a secular bear market.

I don't need elliot wave goobledegook to tell me that.

I also agree with the author that the emergence of big mergers like Cadbury-Kraft (as well many others like MRK-SGP, PFE-WYE) are a sign that animal spirits are returning into the market. These animal spirits are key to sustaining the bull swing.

Sep 10 06:45 AM

[buybigtires:]

So this one buy, one attempt at an acquisition, should send wary investors back into the market? C'mon. People are still losing jobs, the USD is declining, and consumers are decreasing consumption.

I'm not a technical trader, but I think your exuberance is a bit premature, if not completely irrational.

Sep 10 09:10 AM