Beware of the Big Bear Market

by: Leif Peterson

There are several indications for an oncoming bear market.

First and foremost, the daily Ichimoku cloud indicator produced a strong sell signal (chart below, yellow box) for the SP500 (^GSPC on Yahoo) last Friday, July 2, 2010. You can also note from the Ichimoku chart that the SP500 is trading below the cloud, which indicates a bearish bias in the long term. In the intermediate and short term, the market is trading below both the Tenkan-sen (9-day turning line – “TL”) and the Kijun-sen (26-day standard line – “SL”). Thus, every indication from the Ichimoku daily chart is that the market is very bearish, so long traders should be cautious.

click to enlarge images

Over the last 10 years, there have only been 5 occasions when the Ichimoku daily SP500 reflected a strong sell signal. Three of these occurred before the October 9, 2002 low of 776.76 and 2 occurred prior to the March 9, 2009 low of 676.53. For the October 9, 2002 low of the 776.76, the change in the SP500 was -42.1% after the November 24, 2000 signal, -34.1% after the August 15, 2001 signal, and -25.4% after the June 3, 2002 signal. Whereas, for the March 9, 2009 low of 676.53, the change in the SP500 after the January 4, 2008 signal was -52.1% and the change after the January 20, 2009 signal was -16.0% (yellow boxes in chart below). The main point with these signals is that after the initial strong sell signal appeared on November 24, 2000 and January 4, 2008, the total corrections were -42.1% and -52.1%, respectively.

Looking at weekly equity-bond yield spreads (upper panel, chart below), the ratio of yields from intermediate investment corporate grade bonds (VFICX) to yields of intermediate Treasury funds (VFICX) suggests that a strong decline has been in place since mid-April. This does not indicate a strong recovery is taking place from the recent recession, but instead may signal further economic woes during the next several quarters -- and years. The lower panel in the chart below illustrates that, in terms ofreal money,” that is, gold (NYSEARCA:GLD), the ratio of the weekly SP500 to GLD suggests very little net gain in the SP500 over the last year. In this same panel (chart), the ratio of the SP500 weekly close to the weekly long-term Treasuries (TLT) also dropped over the last few weeks, which is due to the drop in price return of the SP500 and greater yields in long-term Treasuries.

The strong Ichimoku sell signal that appeared last Friday for the SP500 should serve as a big warning. The SP500 price return index is a weighted composite of 500 equities, which aside from CBOE or VIX, reflects tremendous momentum in investor sentiment -- and therefore -- trends lasting for several weeks have significant merit for determining longer-term bull and bear market signals. Unfortunately, strong Ichimoku sell signals that have occurred in the daily SP500 have *only* occurred immediately prior to large market sell-offs, such as the subprime mortgage crisis in September/October 2008, and between 2000-2003 during the tsunami that followed the tech bubble burst.

While it is impossible to predict the future, traders who follow the trend may nevertheless be interested in several high-yield dividend stocks that are now trading above the 20-day moving average of the their daily high.

Alliance Bernstein Income Fund (NYSE:ACG) – dividend yield 5.9%, currently has a rising short-term Schaff trend cycle (blue line) and rising long-term Schaff trend cycle (red line), as shown in the chart below (upper panel), and is trading above its 20-day high price:

Another high-yield stock is Energy Transfer Partners (NYSE:ETP) – dividend yield 7.7%, which also has a rising short-term Schaff trend cycle and is trading above its 20-day high price:

Magellan Midstream Partners (NYSE:MMP) – dividend yield 6.2%, is performing well over the last few weeks as its short-term Schaff trend cycle (blue line) is rising and its price return is trading above its 20-day average high:

Lastly, Annaly Capital Management (NYSE:NLY) - dividend yield 15.6%, has both a rising short- and long-term Schaff trend cycle and is also trading above its 20-day high price:

ACG and NLY are currently trending via strong bullish signals. The majority of other high-yield depression-proof dividend plays such as Comcast (NYSE:CCS), Altria (NYSE:MO), and McDonald's (NYSE:MCD) are trending in a bullish pattern and are failing to keep with ACG and NLY.

In spite of the bullish trends for these high-yield stocks over the last several weeks, there is every opportunity for a change to the downside within the near term, given the overwhelming strong momentum observed in the falling SP500 price return, declining value in terms of real money, and bond/Treasury yield spreads. If gold retraces below its February support level of $1054.1, then in terms of real money, the SP500 will drop considerably lower. Recall, that during a strong deflationary downturn, commodities, equities, and municipal bonds can decrease sequentially like falling dominoes. Eventually, there will be nowhere to hide, and any remaining bullish signals will transpose into bear signals. Gold and other commodities will fall with the ensuing flight to cash. A contrarian view for investing in safe short-term Treasuries may be warranted for non-commercial retail traders.

Disclosure: Currently in cash and long PTTRX