You may have seen numerous headlines this past weekend proclaiming that the stock market just had its best week of 2012. This type of reporting is typical of the mainstream financial media and it reflects a myopic view of market behavior. Most financial reporters do not understand market trends and cycles. Instead, they see a weekly gain number that is the largest of the year and consequently conclude that the market just had its "best" week of the year. However, as always, short-term market behavior only has meaning when analyzed in the proper context afforded by the long-term view. The sharp advance last week was nothing more than a technical reaction off of a deeply oversold short-term condition, and certainly not a bullish development when viewed in context (SPY).
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We stress often the need for proper context when performing market analysis. It is all too easy to fall under the influence of the bipolar emotional swings that accompany the daily index movements, especially during periods of elevated short-term volatility. All investing and long-term trading strategies should begin with a thorough understanding of the current secular environment, so it is useful to revisit the big picture often. There have been five secular trends in the stock market since the crash in 1929, three downtrends and two uptrends.
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The current secular bear market began in 2000 following a speculative run-up during the second half of the 1990s. As usual, market behavior clearly signaled that a secular inflection point was approaching and our Secular Trend Score (STS), which analyzes a large basket of fundamental, internal, technical and sentiment data, issued a long-term sell signal in December 1999. Following the topping process in 2000, a prototypical secular bear market began and continues today.
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Stock market secular trends typically last from 10 to 20 years, depending upon the nature of underlying structural economic trends. Since we are currently in the final stage of a debt expansion cycle that began 60 years ago, it is highly likely that the secular bear market from 2000 is still several years away from its terminal phase.
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The STS supports the hypothesis that this secular downtrend is far from over as the score has yet to return to positive territory following the sell signal in 1999. Secular inflection points develop slowly, usually over the course of 6 to 12 months, so the STS will provide plenty of advance warning when the next true investment opportunity develops in the stock market.
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Secular trends are themselves composed of cyclical subcomponents, and the current cyclical uptrend began in March 2009. When they occur during secular bear markets, cyclical rallies have an average duration of 33 months. Therefore, at a current duration of 39 months, the bull market from 2009 is likely in the final stage of its development. Following the market crash in 2008, the latest cyclical rally has been characterized by violent moves higher and lower. As expected in March, the last stimuli-fueled advance from October 2011 has been followed by yet another violent retracement.
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Additionally, our Cycle Trend Score (CTS) issued a confirmed sell signal in April, indicating the highly likely formation of a cyclical top.
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With respect to cycle analysis, the recent transition to left translation on the weekly chart favors a continuation of the decline from April. It remains possible that the half cycle low (HCL) of the current intermediate-term cycle formed in late May and additional sideways consolidation during the next two to three weeks followed by a move below the developing HCL would reconfirm the bearish translation from April.
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To summarize, the violent correction that we had been expecting is in progress and it will likely return to cyclical bull market support sometime during the next few months. The crucial question is whether the April high will ultimately mark the end of the cyclical bull market from 2009, so it will be important to monitor market behavior closely during the next few months. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
