Recent Market Weakness: Just Another Correction, or Major Trend Shift?

During the cyclical bull market that started in early 2003, every time the market penetrated its long term moving average, it ricocheted off like a smooth pebble off a lake.

In hindsight, it looks quite orderly and beautiful (see chart). But each time the indices breach their 200 day moving average, it alarms a lot of investors and “experts” who start to pontificate about the importance of this simple technical indicator.

There’s nothing magical about it. In a bull market this behavior is normal. But in a bear market, the opposite is true - that is, the market is hardly given the chance to poke its head above the 200 day moving average and when it falls below it, it goes deep. In the summer of 2002, for example, it went more than 25% below.

click to enlarge

The noticeable change is that since the intermediate bottom in August 2007, each subsequent trip below the 200 day moving average has been lower. After Tuesday’s shellacking we’re now -5.5% - a place we haven’t been in more than 4 years.

So is this it? Are we on the cusp of a new [gasp] bear market?

No one knows.

All I can do is to follow the technical and sentiment signposts that have been helpful in the past and try to use them to make some sense out of it all.

Although they never line up perfectly, most of the indicators I see are pointing to a correction. The most convincing argument is that investors and traders are reacting with complacency but fear.

I’ve already outlined the sentiment overview, and to that we can add yesterday’s CBOE equity put/call ratio which reached 0.97 - a level that it reached before in mid November 2007, mid August 2007 and March 2007.

Comments

[User 124892:]

AS Jackie Gleason would say, Alice this is the BIG ONE!

2008 Jan 09 03:45 PM

[silvia77:]

great analysis. I also think there will be a short term correction but if the market moves towards a new lower low we can be in for some very bad times..

2008 Jan 10 03:41 AM