Bear Market Rally, or New Bull Market in Stocks?

By: Robert McHugh | Sun, Apr 11, 2010
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While the rally from March 2009 through April 2010 has been impressive, there are big picture, huge Head & Shoulders top patterns that are warning this is simply a Bear Market rally, the eye of the storm, a temporary respite. The rally from March 2009 has not been as long time-wise, or as strong as the decline that preceded it. So far, it has retraced approximately a Fibonacci 60 percent of the 2007 to 2009 decline. It is a Bear Market rally. Because we are in a huge Grand Supercycle degree Bear Market, rallies or bounces can seem large and long. But big picture patterns suggest all the borrowing and spending, and monetary printing by the Central Planners will only produce a temporary Bear Market Bounce at great cost to the Federal Budget Deficit. Another leg lower is likely over the next several years, and the Central Planners cannot prevent it. When it starts is the question.

We are not going to have a consumer-less economic recovery. The consumer, the American Household, remains in trouble. Without the consumer prospering, we are headed for a double dip Bear Market decline. The Central Planners' strategy to generate economic recovery exclusively through Wall Street, ignoring the American Household, will fail. That is what the big picture charts say, that is what historic fundamental economic studies say, and that is what common sense says. As we approach the start of the "bad" six months of the year, this should become evident.

We are fast approaching the start of the "bad" six months of the year, from May through October. "Sell in May and go away," is a favorite cliché of many traders and investors. So a top now would be consistent with this cyclical trend. What is missing are new 52 week lows. For the next significant decline to start, new 52 week lows need to pick up.

We continue to watch for new sell signals in our key trend-finder indicators to announce a top. While the internals -- breadth, volume, momentum -- are weakening, there has not been a change in the tide yet. Signs of a coming trend turn are on the horizon, but until our key trend-finder indicators generate sells across the board, prices could inch higher. We did not get new sell signals in our key trend-finder indicators Friday. The blue chip key trend-finder indicators remain on a sideways signal, while the NDX, RUT and HUI remain on buys.

How Has our Purchasing Power Indicator Performed During the March 2009 to April 2010 Rally?

Our Purchasing Power Key Trend-finder Indicator has performed extremely well during the past year's Bear Market Rally. There were 13 Buy signals along the way, and these buy signals identified a total of 660 points of rally in the S&P 500 if one measures the moves from the closing value of the S&P 500 on the day the buy signal was generated through the level of the furthest move in the direction of the signal that occurred before the next sell signal was generated. These are entry signals and create the opportunity for traders to take as many points as they choose, given their chosen exit strategies unique to their risk appetite, financial strength and trading experience. The entire rally from March 6th, 2009 through April 10th, 2010 has produced a rise in the S&P 500 of 528 points, so our signals more than covered this rally, by generating new buy signals after dips. Our PPI indicator generated buy signals 13 different times, and 13 sell signals, navigating the up and down oscillations in the S&P 500.

What the PPI does, is identify high probability entry points where a new trend that has strong potential occurs. Sometimes the trends disappoint, but in those cases, new signals in the opposite direction are generated quickly, before too much damage can occur. The PPI is just one of three key indicators we provide. When used in conjunction with signals from the other two key indicators, the 30 day and 14 day stochastic indicators, the probability of finding strong new trends is even higher than if just the PPI is used. But as this study shows, by just using the PPI alone, there is plenty of trading opportunity for professional traders. This is not trading advice, but is information that can be given to one's personal financial advisor when formulating trading strategies that fit one's unique situation. Past performance is no guarantee of future performance.

Nine (9) of the 13 buy signals found moves of 4 percent or more. Four (4) of the buy signals found moves of 9 percent or more. Only one signal failed to find a move in the direction of the signal, and in that instance it immediately reversed and generated a sell signal the very next day, which minimized damage.

There has been a ton of back and forth oscillation in this wave (B) rally move from March 2009, which is typical of wave B's, but our PPI Indicator was not fooled by these oscillations, and did a terrific job identifying the key moves in both directions. In fact, the recent decline in January 2010 got picked up by the PPI. It generated a sell signal on January 21st, identifying a 4.25 percent move.

The PPI is a measure of momentum, and waits for momentum to be powerful before generating a new signal. Weak momentum in the opposite direction of its current signal position is considered noise, and ignored. Below, we show a table of the 13 buy signals since March 2009, and how each performed.

Performance of our PPI Indicator During the Bear Market Rally March 2009 to April 2010:

Buy
Signal

Date
S&P 500
Closing
Price
Move In
Direction
of Signal
Furthest
Intraday
Price
Price
Gains
Percent
Move
3/10/2009 719.6 3/26/2009 832.98 113.38 15.76%
4/2/2009 834.38 4/17/2009 875.63 41.25 4.94%
4/23/2009 851.92 5/8/2009 930.17 78.25 9.19%
5/18/2009 909.71 6/11/2009 956.23 46.52 5.11%
6/25/2009 920.26 7/1/2009 931.92 11.66 1.27%
7/13/2009 901.05 8/7/2009 1018 116.95 12.98%
8/21/2009 1026.13 8/26/2009 1039.47 13.34 1.30%
9/8/2009 1025.39 9/23/2009 1080.15 54.76 5.34%
10/6/2009 1054.72 10/21/2009 1101.36 46.64 4.42%
10/29/2009 1066.11 10/30/2009 1033.38 -32.73 -3.07%
11/5/2009 1066.63 12/4/2009 1119.13 52.5 4.92%
1/4/2010 1132.99 1/19/2010 1150.45 17.46 1.54%
2/16/2010 1094.87 4/9/2000 1194.66 99.79 9.11%
  Total 659.77  

We have two intermediate-term trend indicators in addition to our key trend-finder indicators that have done a great job identifying the Bear Market Rally from March 2009:

Our DJIA Call/Put Ratio indicator generated a buy signal on January 28th, 2009, and has remained on that buy signal since. It has caught the entire rally from March 2009. The Industrials rallied 2,625 points, or 31.3 percent, following this buy signal. This indicator identifies intermediate term trends. We present updated readings for this indicator in every daily and weekend market newsletter we publish at www.technicalindicatorindex.com. What this indicator is doing is measuring market sentiment, and identifying high probability turns based upon sentiment changes, using a proprietary formula we have discovered that recognizes points of high probability intermediate trend turns (turns that could last from 3 months to a few years, within larger primary trends).

The other unique indicator we show every night and weekend is our Secondary Trend Indicator, also an intermediate-term trend indicator. The most recent signal generated by this indicator was a buy on November 3rd, 2009. There have been no sell signals since. Since that buy signal, the Industrials have risen 1,229 points, or 12.6 percent. This indicator studies several key measures of market internal strength, measures of breadth, volume, and momentum, and combines them in a proprietary formula designed to identify high probability trend turns that could last several months.

Wave B's are nasty because they have very little logic to their patterns, can take forever, and contain a ton of back and forth subwaves. Wave B's and 4's are murder to trade. The rally from March 2009 has been a Supercycle degree wave (B) pattern. Once this rally phase completes, a powerful wave (C) down move should follow.

S&P500;/DJIA Purchasing Power Indicator

Dow Jones Industrial Average 10-Year Chart with Elliott Wave Count

Dow Jones Industrial Average 12-Year Chart Showing Possible Head and Shoulders Pattern

Wilshire 5000 14-Year Chart With Elliott Wave Count

Check out our April Specials, good through Sunday, April 11th, 2010, including a fabulous 13 month offering, only $239, a little over $18 a month, or 2 years for only $449 at www.technicalindicatorindex.com.

"Jesus said to them, "I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day."

John 6: 35, 38, 40

 


 

Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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