Ian Woodward's Investing Blog

Where next for the Bear Market Rally?

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The S&P 500 has rallied over 13%, the Nasdaq 16%, the DOW 13% and the NYSE 13%, and this is essentially half way back to the highs, between friends.  Since the Base Low on St. Paddy’s Day, we have gradually worked our way back while Type 1, 2, and more recently Type 3 investors have all had varying degrees of success.  Type 4 longer term investors have probably felt the market is still too jittery and are waiting for signals that all is clear for them to venture back in.  There are several forces at this point in time which must be overcome to make that call: 

  1. 200-dma Ceiling – The Market Indexes are all within a few points from their 200-dma and that is an important resistance level which must be broken to the upside…the glass ceiling problem that makes all Bears feel it is time to take short positions.  This one favors the Bears.

  2. Coppock Indicator – On the other hand, the Monthly Coppock Indicator which is a long term measure of when the correction is exhausted to the downside shows that all indexes have either gone negative or are close to doing so and are about to turn up, which bodes well that within another month or so we should see that happen.  This one favors the Bulls.

  3. Volatility Index – The VIX complacency with now over 25 days since the %B has been below the Bandwidth of the Bollinger Bands, has now found its historical mean level of around 19, but is substantially below where the Bears had hoped to make it four in a row for an assault on the highs bouncing off its 200-dma…with no such luck.  However at this time they are beginning to smell blood, given that there is little further good news for a while in the offing.  Although the Bulls are in control, this one goes to the Bears, since it would appear we are now reaching overbought levels.  However, I sense that if this low volatility keeps up the worst that might happen is a quick knee jerk upwards and then again have the %B turned back below the Bandwidth…suggesting more of a pause to refresh and then renewed efforts to drive the VIX below 18.

  4. NH – NL – The New Highs versus New Lows are both semi-dormant, and until we see some measurable difference to the tune of at least 150 New Highs, this rally remains suspect in its conviction for the Bulls to show they have full confidence and have taken command.  Although we would expect the New Highs to be a lot higher, there are fresh signs of life just today that they might be stirring again.  With the New Lows so calm, I feel that we should give a slight nod to the Bulls.

  5. Old Leaders – With the Earnings Season now at its peak period for the second quarter, there has been some brutal profit taking in the Leadership stocks in the Wolf Packs that have been in vogue for a long time, i.e., the Fertilizers, the Solars, the Steels, the Transport – Shipping (hit hardest earlier, but now cleaned out and showing signs of life again).  Likewise of the five Silverback Gorillas of the last Bull rally, only GRMN has bit the dust, though the other four all had big corrections.  However, they have or are recovering every day and the likes of AAPL, BIDU, GOOG and RIMM all live to fight another round.  It is only natural that most of these groups will come up against the “double-top syndrome” and will likely stall there before driving through.  Bears.

  6. New Leadership – Beaten down new leading Groups are in Machine – General and Technology by way of Internet –Services and Semi – Mfg as I mentioned ten days ago.  Although the number of High ERG stocks over 270 rose sharply a week ago, it is still below 100, though overall Accumulation in the broad market has risen sharply and suggests the rally is beginning to make all boats rise.  The Bulls have it for now.

  7. Psychology – I gave you the Line in the Sand where the Psychology of the market turned distinctly bearish on January 10 and only last week I showed you where having now broken through that same Line to the upside, the perception is that the market accepts that the worst is over.  Unless there is another major shoe to drop by way of a surprise, in my opinion we should pause to refresh and then make another assault on the remaining challenges to turn this into a decent Market Rally. Bulls.

  8. Long Term – Now we come to the 40-week Bollinger Band process I have described before and showed again recently called the “Mark Pharr chart”, and that beast is still below the moving average, so we do not have the all clear from that point of view, though it has been inching up to the middle band surely but slowly.  That tells us we are still in a Bear Market Rally for now.  Bears.

  9. Seasonality – We are soon reaching the season of graduations, weddings and vacations when Wall Street traditionally turns to mush, and that statistically gives us the worst three months from July to September.  In addition, in an election year, June is the 3rd best month on the Nasdaq, so Technology may be the sector that keeps this market up before the summer doldrums, since it already shows signs of improving. Bulls.

  10. Market Winds – In Yorkshire, England, there is a favorite saying regarding the weather which goes “Ne’er cast a clout till May be out”, which translated means don’t get rid of your winter woolies until then.  I was a Londoner before becoming a Philadelphian, New Yorker, Texan and Californian, so maybe we can stretch this rally to June!  My saying is “When the wind is at your back, Attack; when it’s in your face…Disgrace”.  Let the market tell you which way the wind is blowing. 

 In Summary, the Bulls have the edge for now, but like the signs of the Zodiac they can change in a hurry.  I am not a soothsayer, but I just look at the Tea Leaves and the feel is as I see it above.    Best Regards, Ian.

4 Responses to “Where next for the Bear Market Rally?”

  1. Charles E. Hughes Says:

    Ian:
    My comments are dissolving away in cyberspace before I can finish writing them on the comment board. What a succinct appraisal of pertinent factors affecting the markets and all traders and investors!!! This is an excellent outline of topics for future consideration as the factors change. Thanks for the keen insight. Charlie

  2. Tom Mc Dermitt Says:

    Ian

    Much appreciate your comprehensive yet succinct view of the current market environment!

  3. Jay Robinson Says:

    Hi Ian, I think you’ve mentioned this before but there still seems to be a little confusion (probably on my part).
    When you say 150 new highs as in the following sentence:

    NH – NL – The New Highs versus New Lows are both semi-dormant, and until we see some measurable difference to the tune of at least 150 New Highs, this rally remains suspect in its conviction for the Bulls to show they have full confidence and have taken command.

    Do you mean in the NYSE alone or in the NYSE, NASDAQ and AMEX combined? I’m thinking you said in the past, the NYSE only but can’t really remember.

  4. ian Says:

    Hi Jay: Thanks for asking about clearing up the NH – NL good stuff.

    1. All my work is done off the NYSE ONLY. This includes the Eureka, Hindenburg Omen, etc.
    2. Ideally one needs to see at least one day with the New Highs greater than 150. We had four days back on 4/16, 4/17, 4/18 and 4/21 when the readings were 109, 103, 118, and 106, respectively. I took that as “Close enough for Gov’t Work”.
    3. Likewise the New Lows have been Dormant with the highest number on 4/22 of 66 and mostly since then less than 30. That again to me was a good sign.
    4. The last two days the New Highs have perked up again with readings of 93 and 84…yes 84 yesterday, even though it was a bad day on the Market all around, compared to 32 New Lows. I wish I had seen that yesterday…that was a good sign.
    5. We need to see the New Highs go back up above 150 and stay up there for days on end for a truly strong Bull Rally.
    6. Now here’s the important point…New Lows can also rise, but we need to see NH -NL at least 60 apart consistently for the Bulls to have control.
    7. Lastly, when the New Lows begin to dominate, that is the time to look for a correction until the cycle starts all over again.
    8. Finally, keep an eye on Ron’s chart on this stuff in HGSI…the view escapes me for the moment.

    Best Regards, Ian.

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