Remember What This Volatility Feels LIke

Includes: DIA, QQQ, SPY
by: Paul Castro

With the higher closing highs achieved recently in the S&P 500, the Dow Industrials and the Nasdaq and the Dow Theory buy signal, one must assume a new uptrend is in place.

While we never quite achieved bear market territory on a closing basis in the "Big 3" indexes, we were definitely in a downtrend and had reached bear market territory on an intra-day basis. Also, small caps (most of my portfolio) as measured by the Russell 2000 were well into bear territory on both a closing and intra-day basis.

Let's illustrate the recent highs and lows of the "Big 3" with the S&P;

The S&P has just recently made a higher intermediate high for the first time since last October. For my purposes, to qualify as an intermediate high/low the move must have been at least 5% from the previous low/high. So, by my count;

08.15.07 close = 1,406.70 = higher low,
10.09.07 close = 1,565.15 = higher high,

01.22.08 close = 1,310.50 = lower low (first lower low since Nov 02 which was also the last lower low of the post-bubble bear market),

02.01.08 close = 1,395.42 = lower high,
03-10-08 close = 1,273.37 = lower low,
05.06.08 close = 1,418.26 = higher high (first since Oct 07)

What this most recent higher high means is a new uptrend (ie, bull market) has begun. On average since 1984 it has taken the S&P 201 calendar days to move from an intermediate bottom to an intermediate top and 74 calendar days to move from an intermediate top to an intermediate bottom. Escalator going up, elevator coming down ring a bell? The fact that the lows and highs came so closely spaced together in time (ie, volatility) tells me we made a pretty important bottom on 03.10.08.

The last time the S&P made a higher high after a series of lower highs and lower lows was in Mar 04. That uptrend lasted until the higher high in Oct 07 which preceded the lower low in Jan 08. So the last uptrend in the S&P was 3 yrs and 7 months in duration. The one event which would annul the new bull market thesis would be a take-out of the 03.10.08 close, possible but not probable in my opinion.

When the next end of downtrend/beginning of uptrend cycle arrives, investors would be best served to remember what the last few weeks have felt like. This is what it's like to be in the early innings of a new bull market.