S&P Price Action

One interesting price level to look at when coming off of market bottoms is whether or not a new bear market (20% decline) would take the index back to new lows.  Up until recently, a 20% decline would have meant a lower overall low, but if the market were to top out now, a new bear wouldn’t mean the March lows would be violated.  This acts as an additional level of support.  As shown below, if a new bear market started following yesterday’s high, the -20% threshold would only take the S&P 500 down to 725.79, which gives investors 50 points to work with before the index reaches the March low of 675.

Source: Bespoken Research

Triple Top (Reversal)

The triple top is a reversal pattern made up of three equal highs followed by a break below support. In contrast to the triple bottom, triple tops usually form over a shorter time frame and typically range from 3 to 6 months. Generally speaking, bottoms take longer to form than tops. We will first examine the individual parts of the pattern and then look at an example.

1. Prior Trend: With any reversal pattern, there should be an existing trend to reverse. In the case of the triple top, an uptrend or long trading range should be in place. Sometimes there will be a definitive uptrend to reverse. Other times the uptrend will fade and become many months of sideways trading.
2. Three Highs: All three highs should be reasonable equal, well spaced and mark significant turning points. The highs do not have to be exactly equal, but should be reasonably equivalent to each other.
3. Volume: As the triple top develops, overall volume levels usually decline. Volume sometimes increases near the highs. After the third high, an expansion of volume on the subsequent decline and at the support break greatly reinforces the soundness of the pattern.
4. Support Break: As with many other reversal patterns, the triple top is not complete until a support break. The lowest point of the formation, which would be the lowest of the intermittent lows, marks this key support level.
5. Support Turns Resistance: Broken support becomes potential resistance, and there is sometimes a test of this newfound resistance level with a subsequent reaction rally.
6. Price Target: The distance from the support break to highs can be measured and subtracted from the support break for a price target. The longer the pattern develops, the more significant is the ultimate break. Triple tops that are 6 or more months old represent major tops and a price target is less likely to be effective.

Throughout the development of the triple top, it can start to resemble a number of patterns. Before the third high forms, the pattern may look like a double top. Three equal highs can also be found in an ascending triangle or rectangle. Of these patterns mentioned, only the ascending triangle has bullish overtones; the others are neutral until a break occurs. In this same vein, the triple top should also be treated as a neutral pattern until a breakout occurs. The inability to break above resistance is bearish, but the bears have not won the battle until support is broken. Volume on the last decline off resistance can sometimes yield a clue. If there is a sharp increase in volume and momentum, then the chances of a support break increase.

When looking for patterns, it is important to keep in mind that technical analysis is more art and less science. Pattern interpretations should be fairly specific, but not overly exacting as to obstruct the spirit of the pattern. A pattern may not fit the description to the letter, but that should not detract from its robustness. For example: it can be difficult to find a triple top with three highs that are exactly equal. However, if the highs are within reasonable proximity and other aspects of the technical analysis picture jibe, it would embody the spirit of a triple top. The spirit is three attempts at resistance, followed by a breakdown below support, with volume confirmation. ROK illustrates an example of a triple top that does not fit exactly, but captures the spirit of the pattern.

• The stock was in an uptrend and remained above the trend line extending up from Oct-98 until the break in late August 1999.
• Over a period of about 4 months, the stock bounced off resistance around 23. The first attempt happened in May, the second in July and the third in August.
• The decline from the third high broke trend line support and the stock continued to fall past support from the previous lows. Triple top support should be drawn from the lowest low of the pattern, which would be the May low around 19.80.
• Volume expanded after the stock broke trend line support. The stock paused for a few days when support at 19.80 was reached, but volume accelerated when this support level was broken in late September (gray dotted vertical line). In addition, the Chaikin Money Flow turned negative and broke below -10%.
• After the support break, there was a test of the newfound resistance a few weeks later. Money flows continued to indicate selling pressure and volume expanded when the stock began to fall again.
• The projected decline was 3.2 points, from 19.80 down to 16.60, and the stock reached this target soon after the resistance test.

Source: Stock Charts

Falling Wedge (Reversal)

The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout.

The falling wedge can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type (reversal or continuation), falling wedges are regarded as bullish patterns.

1. Prior Trend: To qualify as a reversal pattern, there must be a prior trend to reverse. Ideally, the falling wedge will form after an extended downtrend and mark the final low. The pattern usually forms over a 3-6 month period and the preceding downtrend should be at least 3 months old.
2. Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be lower than the previous highs.
3. Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be lower than the previous lows.
4. Contraction: The upper resistance line and lower support line converge to form a cone as the pattern matures. The reaction lows still penetrate the previous lows, but this penetration becomes shallower. Shallower lows indicate a decrease in selling pressure and create a lower support line with less negative slope than the upper resistance line.
5. Resistance Break: Bullish confirmation of the pattern does not come until the resistance line is broken in convincing fashion. It is sometimes prudent to wait for a break above the previous reaction high for further confirmation. Once resistance is broken, there can sometimes be a correction to test the newfound support level.
6. Volume: While volume is not particularly important on rising wedges, it is an essential ingredient to confirm a falling wedge breakout. Without an expansion of volume, the breakout will lack conviction and be vulnerable to failure.

As with rising wedges, the falling wedge can be one of the most difficult chart patterns to accurately recognize and trade. When lower highs and lower lows form, as in a falling wedge, a security remains in a downtrend. The falling wedge is designed to spot a decrease in downside momentum and alert technicians to a potential trend reversal. Even though selling pressure may be diminishing, demand does not win out until resistance is broken. As with most patterns, it is important to wait for a breakout and combine other aspects of technical analysis to confirm signals.

FCX provides a textbook example of a falling wedge at the end of a long downtrend.

• Prior Trend: The downtrend for FCX began in the third quarter of 1997. There was a brief advance in Mar-98, but the downtrend resumed and the stock was trading at new lows by Feb-99.
• Upper Resistance Line: The upper resistance line formed with four successively lower peaks.
• Lower Support Line: The lower support line formed with four successive lower lows.
• Contraction: The upper resistance line and lower support line converged as the pattern matured. Even though each low is lower than the previous low, these lows are only slightly lower. The shallowness of the new lows indicates that demand is stepping almost immediately after a new low is recorded. The supply overhang remains, but slope of the upper resistance line is more negative than the lower support line.
• Resistance Break: In contrast to the three previous lows, the late February low was flat and consolidated just above 9 for a few weeks. The subsequent breakout in March occurred with a series of strong advances. In addition, there was a positive divergence in the PPO.
• Volume: After the large volume decline on 24-Feb (red arrow), upside volume began to increase. Above-average volume continued on advancing days and when the stock broke trend line resistance. Money flows confirmed the strength by surpassing their Nov-98 high and moving to their highest level since Apr-98.
• After the trend line breakout, there was a brief pullback to support from the trend line extension. The stock consolidated for a few weeks and then advanced further on increased volume again.

Source: Stock Charts

Richard Russell (Dow Theory Letters): Are we in a bear market rally or a new bull market?

“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither – no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ – action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

Source: Richard Russell

Has stock market rally run its course?

“From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally’s leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low. Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks [90%] trading above their 50-day moving averages.”

Not surprisingly, investors’ lingering worries about the financial sector resurfaced yesterday, pulling the S&P 500 Index down by 4.3% and the Dow Jones Industrial Average by 3.6% – the worst losses since early March and in all likelihood a Lowry’s 90% down-day.

While the short-term movements play themselves out, it is important to remember that the longer-term charts have not yet signalled a secular uptrend. Using monthly data, the graph below shows the multi-year trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold, as confirmed by the RSI indicator (blue line).

The stock market will tell its own story over the next few days, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, it’s “Katie, bar the door” (quoting from Richard Russell).

Moving averages – indicating bull or bear markets?

The table below provides a summary of the 50- and 200-day moving averages pertaining to a number of global indices. The orange shading indicates indices still trading below their moving averages and show the percentage gain required in order to reach the moving average line. Conversely, the green shading shows those indices that have already breached the moving averages to the upside and the numbers indicate the percentage decline that will reverse the break.

Click on the table below for a larger image.

The 50-day moving average is an indicator of the secondary trend and has been breached by all the markets on the list with the exception of Copenhagen. However, the longer-term 200-day moving average is of more importance as an indicator of the primary trend. Although it is a lagging indicator by construction, it fulfils a useful role to keep investors on the right side of the long-term trend.

It is important to note that the three conditions must be met in order to flash new equity bull markets, namely (1) the index in question must penetrate the 200-day average, (2) the 50-day average must cross the 200-day line, and (3) the 200-day average must turn upwards.

The current situation is one where a number of emerging markets – China, India, Brazil, Venezuela, Taiwan, South Korea and Chile – have to a greater or lesser extent crossed their respective 200-day moving averages. In the case of China, the 50-day line has also broken the 200-day line.

Studying chart patterns of the various global bourses leads one to conclude that in the case of a number of emerging markets base formations have possibly been completed and that the cycle lows may very well be in. However, as far as mature markets are concerned, the picture remains inconclusive until primary trend indicators turn positive

Difference Between “a Market Bottom” and a “Bottoming Process”?

by Marty Chenard

… and, Where are We Now?First, a “market bottom” call is typically a speculative conjecture based on anecdotal stories and some improving data suggesting that a market downturn may be ending.

Often times, the improving data is not positive, but merely “not as negative as before”.

It is from an improvement of “not as bad as last time”, that some investors assume a conclusion that there is “a trend of improvement occurring that will continue into a turnaround where everything will become positive soon”.

Remember the old saying, “the trend is your friend”. The opposite was also inferred … “going against the trend is your enemy”.

If speculative conjecture is or was correct, then the stock market’s trend would have also changed to an “up trend” from a “down trend”. If that has not happened, then there is no “proof” that the speculation of a market bottom was indeed true.

So, let’s look at the stock market’s trend, and we will look at it on the New York Stock Exchange because that is where most of the Institutional trading is done.

Note the red arrows in the chart below. We have a low, followed by a high, followed by a lower/low on the NYA Index. The NYA Index is currently moving up … BUT, it has not made a higher/high yet.

By definition, down trends are conditions with lower/highs and lower/lows. Up trends, are conditions with higher/highs and higher/lows.

So far, we still have lower/highs and lower/lows. Until a higher/high is made, this is still a down trend.

After a higher/high is made, you need to see a higher/low followed by another higher/high for a new up trend to be verified.

Conclusion: We have not had a trend reversal yet. Yes, things appear to be improving, but the market is not entirely convinced of the sustainability of the improving conditions yet.

Technical talk: Sentiment review

Secular liquidity, a.k.a. buying power, as seen through the eyes of current individual investor allocations relative to historical norms, shows ample liquidity on the sidelines and in cash. Current levels approximate liquidity seen at the 1990 and 2002 lows, which continues to suggest that there is probably enough liquidity to keep moving stocks higher in this snapback/bounce.

When combined with incredibly negative investor expectations, no alternative for return in fixed income, and the principles of mean reversion at work and moving higher with some volatility, pullbacks (possible retest of lows) and consolidation are a reasonable expectation still. Remember, continue to watch how stocks act on bad news. When they rally on bad news, not only does it suggest investors are looking over the valley, but it also suggests liquidity is more than sufficient to absorb the selling.

Granted, after a 25% rally off the lows and stiff resistance in front of us near 850 (S&P 500), it won’t be an easy climb. The reason it is never an easy climb off the lows is because at every level higher on an index, pockets of under-water investors (i.e. losing money positions) can sell at break-even prices. Nonetheless these indicators suggest we can move higher over time. We will continue to monitor for changes that would suggest this argument no longer holds true.

Shorter-term sentiment measures such as Put/Call ratios and AAII Bearish Sentiment Survey, which were decidedly bullish for the market several weeks ago via their bearish readings, have moderated but are not yet at levels that would be construed as a negative.

Click on the graphs for larger images.

Source: Kevin Lane

Sustainable Bull Market Not Likely

by Chris Ciovacco

Rather than relying on hope as the primary driver for making decisions, investors would be well served to focus on the fundamental and technical facts. An analysis of the facts leads us to conclude we are facing the following in terms of probable outcomes:

• Highest Probability – New lows / continuation of bear market.
• Moderate Probability – Cyclical bull – higher highs – followed by retests or new lows.
• Lowest Probability – A sustainable bull market (secular).

Fundamentals Remain Weak: From November 1929 to July 1932, there were five rallies in stocks between 20% and 23%, and all were followed by lower lows. In the 2007-2009 bear market, banks have been the area of primary concern. Banks remain a concern. While many market participants dismiss unemployment figures as lagging indicators, they fail to recognize that every time unemployment ticks up, default rates on all types of loans are going to tick up as well. The government has spent quite a bit of time and energy focusing on toxic assets in order to protect bank bondholders. The government’s programs will have a muted effect as long as housing prices continue to fall and unemployment continues to rise. The inventory of homes for sale remains very high. Home prices have further to fall until supply and demand come back into balance. As prices fall, the balance sheets of banks will continue to deteriorate. It is widely accepted that unemployment will rise further, which means default rates on loans will also continue to climb.

Recession Related Problems Still To Come: The government’s vast market intervention will do little to stem the tide of rising credit card and commercial real estate defaults. Banks have received significant government assistance with toxic assets, but they have major problems with more typical recession related issues, such as credit cards and commercial real estate defaults. Below are some excerpts from recent Bloomberg stories S&P 500 Can’t See Enough Money to Feed Stocks’ Rally and Mayo Gives Banks ‘Underweight’ Rating on Loan Losses.

• Wall Street analysts overestimated bank profits for at least six consecutive quarters.
• Commercial property loans in default or foreclosure jumped 43 percent in the first quarter as the contraction reduced occupancies and the credit crisis stymied refinancing. The decline may force banks to increase loan-loss provisions and write down the value of commercial property loans, which Citigroup, Bank of America and JPMorgan are all carrying at 100 percent of face value, according to estimates in a March 24 report by Richard Ramsden, an analyst at New York- based Goldman Sachs Group Inc.
• CLSA analyst Mike Mayo assigned an “underweight” rating to U.S. banks, saying loan losses may exceed Great Depression levels and the government may be forced to take over large lenders.
• “While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” said Mayo, who joined CLSA from Deutsche Bank AG last month. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”
• Mayo said he expects loan losses to increase to 3.5 percent, and as high as 5.5 percent in a stress scenario, by the end of 2010. The highest level of loan losses in the Great Depression was 3.4 percent in 1934, according to the report [by Mayo].
• The nation’s largest banks may be transitioning from a financial crisis marked by writedowns of capital to an economic crisis featuring large loan losses, Mayo wrote. The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.
• Mayo said solutions to the banking crisis will take time, as the increase in risk happened over a decade or more.
• Meredith Whitney, who left Oppenheimer & Co. in February to found Meredith Whitney Advisory Group LLC, said in a Forbes interview that banks will continue to write down their mortgage assets as home prices decline further than lenders expected. Home prices are not done falling and will ultimately drop 50 percent from their peak, Whitney said today in a CNBC interview.
• The unemployment rate also has exceeded banks’ projections and could lead to further loan losses, Whitney told Forbes. Banks “by and large” will show profits in the first quarter before provisions for loan losses, Whitney said on CNBC. (Source: Bloomberg.com).

Earnings Are Still A Problem: The S&P 500 is currently trading at 14x forward earnings. Forward earnings are another way of saying estimated earnings. If you have worked on Wall Street for more than a week, you know estimates of future company earnings are extremely inaccurate, especially estimates made 12 months in advance. Earnings estimates are about as accurate as a local weather forecast made a year in advance. Since January 1, 2009, earnings estimates for the S&P 500 have dropped from $75 to $59 (a 34% decline in three months). The odds are extremely high that earnings estimates for the next 12 months will continue to be reduced significantly in the coming months, which means the S&P 500 is trading with a PE higher than 14. Bear markets can end with PEs in single digits.

Recent Rally Impressive: The probability of a cyclical bull market taking shape has increased in recent weeks as investors have shown an increased appetite for risk in some markets. A cyclical bull market, in contrast to a secular bull market, is much shorter in duration and eventually gives way to the primary bearish trend. A cyclical bull market could see the S&P 500 advance as high as 940, which is 15% higher than current levels. Under the cyclical bull market scenario, stocks would take one of three paths after making higher highs (above 840):

• A correction back toward 840.
• A successful retest of the November 2008 or March 2009 lows (666-741).
• New bear market lows (below 666 on the S&P 500).

Some Positive Signs: Crude oil has shown some bullish signs by successfully testing a low, and then making an important higher high. Several markets, including some foreign stock markets and some commodity-related investments, have traced similar bullish paths in recent months. These are the markets we are focusing on at CCM as possible investment opportunities.

Some Concerns: The S&P 500 has not successfully tested a low, nor has it made an important higher-high. The odds are very high that before a new bull market can begin, the S&P 500 would have to successfully retest 741 or 666. This retest may come after higher highs, maybe as high as 940 on the S&P 500. The retest may occur during the current pullback or not for several months. Roughly 33% of the Dow 30 stocks have successfully tested a low, which leaves 67% most likely in need of a retest before a new bull market can start. Successful investors always focus on probabilities. Inexperienced investors are always looking for forecasts and predictions.

Some S&P 500 Levels To Watch: Support below the market may kick in at 770, 750, 730, and 700. Resistance above the market is at 836, 877, 885, and 944.

Leading Markets Show Signs Of Weakness: The markets shown below are some of the strongest markets in terms of technical strength. The technical strength tells us investors are more optimistic about these markets than they are about weaker markets such as the S&P 500. These markets may offer opportunities in the event we are in a new secular bull market or a cyclical bull market. While these markets all have some very positive characteristics, there are some technical yellow flags that we should not ignore.

Indicators Not Aligned With Price: In technical analysis, indicators should confirm moves in prices. For example when prices make a new high, we would like to see numerous technical indicators make a new high as well. When prices make a new high, but an indicator fails to make a new high, we have what is known as a negative divergence. A negative divergence can be an early signal that the bulls are losing some of their grip on the bears. Since March 23, 2009, we have seen numerous negative divergences in several leading markets. A single negative divergence in a single technical indicator is not all that concerning. However, the negative divergences become more significant when we see them in numerous indicators and across several markets. Below we present some negative divergences that may point to further corrections in risk assets. Since these divergences are shown on daily charts, they tell us to be cautious in the short-term. They do not necessarily send signals that these markets cannot advance after the current correction has run its course. Like all technical analysis, these divergences help us with probable outcomes – not certain outcomes. Once these divergences are cleared, positive divergences may appear which would be supportive of the cyclical or secular bull market outcomes. It is important to note these divergences appeared before markets started their current pullback.

S&P 500 Has Yet To Hold A Low: Our confidence level in the S&P 500 is not as great as markets that were able to hold above an important low and subsequently make a meaningful higher high. For those who missed it, we recently outlined some additional fundamental concerns in Stock Rally Built On Sand?.

The consensus seems to be for higher highs in stocks followed by a resumption of the bear market. While we can see this possibility, we also point out that few are acknowledging the possibility of new bear market lows. The consensus is rarely right in the financial markets. As a result, it is important to understand the big picture and observe with an open mind. If we do so, the markets will provide us with some meaningful insight into the state of the global economy.

The charts and commentary above are for illustrative and educational purposes only and are not recommendations to buy or sell any security.

Key ETF Performance

Below we highlight the 1-day, 1-week, and 1-month performance of key ETFs across all asset classes.  As shown, the last month has been huge for equity ETFs across the globe, as stock indices everywhere have rallied from 20% to 40%.  In the US, the Financial ETF (XLF) has been the best performing sector ETF with a gain of 50%.  Health Care (XLV) has rallied the least at 10%.  Internationally, India (INP) and Italy (EWI) have rallied the most at 38%.  Japan (EWJ) has rallied the least at 19%.  The oil ETF (USO) is up 5.5% over the last month, but natural gas (UNG), gold (GLD), and silver (SLV) are down.  And fixed income ETFs are pretty much flat.  With gains like these in such a short time frame, it wouldn’t be a bad thing for stocks to take a breather, as long as the prior lows aren’t breached.

Source: Bespoken Research

Identifying a bear market bottom – Richard Russell (Dow Theory Letters)

“First, based on the 76 years of the Lowry’s studies, prior to a bear market bottom, it is usual for their Selling Pressure Index (supply) to decline significantly, indicating that the desire to sell is being exhausting. Secondly, Lowry’s Buying Power Index (demand) begins to climb well before the final bear market bottom.

“This is NOT what has occurred. From its March 9 low, the Buying Power Index has risen an impressive 46 points. However, and this is the big problem, since March 9 Lowry’s Selling Pressure Index has declined by a mere 13 points. Thus, Selling Pressure has only dropped half as much as Buying Power has advanced. This suggests that there is still far too much desire to sell built into this market. Any cessation of buying will therefore succumb to selling, and this is NOT how new bull markets start. Selling Pressure is still far too high.

“From another standpoint I continue to believe that this advance is not the beginning of a bull market. Primary movements in the stock market tend to have a slow, persistent plodding look. In contrast, corrective moves tend to be rapid and violent, often spurred on by panic short covering. The action of this market since the March lows has the look of a secondary correction. The speed and the steep angle of ascent is suggestive of a bear market rally.

“Since March 9, the Dow has gained roughly 940 points in nine days. Thus, the Dow has regained 15% of its bear market losses in a mere nine days. This is bear market correction-type action.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Moody’s Survey of Business Confidence

“Business pessimism remains deep and widespread across all industries and regions of the globe. Survey responses regarding hiring and equipment and software investment fell to record lows last week,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, the Survey concluded that it was encouraging that businesses were becoming steadily less negative about the economy’s prospects later this year.

Source: Moody’s Economy.com, March 30, 2009.

Similarities with the 2002 Bear Low

by Francis Bussiere

Market keeps behaving like 2002 Venus retro low

Courtesy of StockCharts.com

Moon cycles are negative into mid April

A crash alignment for the 2002 and 2008 lows

A Venus retro alignment for the 2002 and 2009 lows

Courtesy of StockCharts.com

Another Reason We’ve Seen The Market Low

About a year ago I wrote about how the stock market resembles a dog on a leash. Prices fluctuate from the trend, sometimes in extreme spikes which mark important inflection points.

I thought I’d revisit the idea by taking a long term look at the S&P 500 and comparing how it has fared to its own long term (200 moving average). To equalize things and make it comparable over time, I expressed the divergence from the mean as a percentage:

Looking at the data from 1950 to present, here are the rare times when the S&P 500 Index (SPX) traded at an extreme relative to its simple 200 day moving average:

• July 26th 1962 -22.62%
• May 26th 1970 -23.18%
• October 4th 1974 -28.58%
• October 19th 1987 -24.75%
• Sept 21st 2001 -22.11%
• July 23rd 2002 -26.98%
• October 7th, 2002 -23.84%
• November 20th 2008 -39.79%

The dates should be easily recognizable since they correspond to almost every single major turning point in recent market history. The numbers represent the percentage relative to the long term moving average. So on July 26th, 1962 the S&P 500 traded 22.62% below its simple 200 day moving average.

Looking at the data this way, you easily gain perspective on just how epic the recent market action has been. Not since 1929 has the market veered off so dramatically from its long term path. Put another way, if the November 2008 low doesn’t mark a significant inflection point, it will be the first time.

A quick back-of-the-envelope calculation shows that 60 trading days after these dates shown above the market is always higher, sometimes significantly:

• 7.95%
• 10.03%
• 12.93%
• 10.72%
• 6.14%
• 9.54%
• 8.3%
• 20.9%

Even if we assume that the November lows will indeed mark a significant low for the S&P 500, there is no reason to believe that prices would simply climb higher from here onward. We could enter a protracted sideways market, or we could also slowly drip lower, revisiting the previous lows. But it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.

Yesterday’s window dressing in equities markets are about to finish. We will head lower again.

The continuing stream of bad macroeconomic figures and no bailout packages this week will leave equities to head lower from here.

Calendar

What’s going on?

• The Japanese manufacturer’s confidence has suffered its sharpest decline in more than 3 decades (back to 1975) amid plunging exports, slowing domestic demand and looming deflation the Tankan survey showed.
• Porsche is more a hedge fund than a carmaker. They made more than 4 times earnings on speculation in VW-shares than they did on car production. However they are deeply indebted now and dependent on credit lines.
• Sarkozy will walk out of the G20-meeting if he does not get an institution that regulates international financial markets. It’s going to be interesting.

FX

Equities

Futures

100 Days from Major Troughs

Credit Suisse Fixed Income Group noted the diversity of performance around the first 100 days of major
market lows in US equities.

The first of these shows the past episodes that might turn out to be the most relevant. Note that one of these is the post 1929 crash bear market rally – it just happened to be 46% or so over five months. Which is actually typical of the first year of major bull markets.

The second shows some less exciting episodes that were nonetheless significant market
bottoms rather than mere staging posts towards significant new lows.

Source:
The First 100 Days
Jonathan Wilmot, James Sweeney, Matthias Klein
Credit Suisse, Fixed Income Research, 26 March 2009

http://www.credit-suisse.com/researchandanalytics

US Sector Snapshot

Below we highlight our trading range and breadth charts for the S&P 500 and its ten sectors.  The trading range charts highlight overbought/oversold levels for the various sectors, and the breadth charts highlight the percentage of stocks in the sector trading above their 50-day moving averages.

The S&P 500 is currently right at its 50-day moving average, and 49% of the stocks in the index are trading above their 50-days.  A few days ago, more than 70% of stocks were trading above their 50-days, so we’ve pulled back from those overbought levels in the last two days.  Most sectors are bouncing around their 50-days as well, so we’re currently at a key inflection point for the market.  If indices can break above their 50-days and hold for more than a few days, the market’s uptrend could continue for some time.  If we continue to head lower over the next day or two, however, oversold levels will be back in the crosshairs quickly.  For now, we’re just experiencing a healthy overbought pullback within a short-term uptrend from the March 9th lows.

Source: Bespoke Research

CNBC Report by Bill McLaren – 27 March 09

LET’S LOOK AT THE S&P 500 INDEX

Two weeks ago on Squawk Box I said stocks looked good and the index would rally 12 trading days then we’d have to assess it again. Yesterday was the 13th trading day of the rally so here’s the assessment. As we discussed last week, if this were a last leg down in the bear campaign the time of that leg would be either 60 to 64 days or 90 to 99 days from the January high. The low was 60 days from that high and 90 days from the December 8th high which was very important because many stocks including the financials hit their highs on that date. The index was then 90 days form the December high and since 90 is a completion cycle for many stocks it carried a strong probability of ending the leg down.

If the rally could exceed 3/8 of that leg down it was sufficient confirmation the leg down was complete and there would be a strong rally into the 12th trading day.

This vibration in time should continue so there are three important time windows the next two months. The 6th/7th of April at 30 days from low and 90 and 120 from highs. If the index goes down into that “time” with a 3 to 5 day move down it would be bullish and present a low. If the index goes up into that date with a distribution pattern it could indicate a run at the March lows. The next important time window would be around the 20th of April at 45 calendar days from low and then 60 calendar days around the 6th of May.

If this is an end to the bear the index will either build a base that will take out to May 6th as it did in 1938 or the index will test the March low. This has been the largest month up since October 1974.

SO LET’S LOOK AT OCTOBER 1974 IN THE S&P 500 INDEX

The low to the 1973/1974 bear campaign was October and December. During 1974 the index found low in October and ran up into an early November high and turned down on the 32nd calendar day from low. But there was a very obvious distribution pattern going into the 30 day time window. So far our current circumstance doesn’t show a distribution. It then went down 32 days and provided a higher low at 45 days from high. The Dow Jones Industrials moved to a marginal new low below October in December 1974 creating a bullish divergence between the two indexes.

I am confident of the time periods, it will simply depend up how the index goes into those time windows to determine if the bear campaign is complete and if it will build a base of retest the March low.

Source: McLaren Report

Is this Stock Market Rally Real ?

Is this stock market rally for real, or is it just an upward correction in a bigger bear market?

The worrying aspect is the rapidity with which the price increases have occurred. To gauge just how “violent” it has been, Mark Hulbert of  MarketWatch, compared the rally since the March 9 lows to a composite of the stock market’s behavior over the first two weeks of all bull markets since 1900. The graph below indicates that the market is perhaps in need of catching its breath.

What MUST Happen Before a New Bull Market Starts?

by Marty Chenard

It has probably been a few months since we last shared our Institutional Index chart with you.

Many of you know that following what Institutional Investors are doing is critically important for investors. With over 50% of all the daily volume coming from Institutional Investors each day, it makes them the “big guns” in the stock market. Going against them is always a bad idea … if they are selling and you are buying, you will lose the game. (The Institutional Index is a compilation of the action of the “core holdings” owned by Institutional Investors and is posted daily on our paid subscriber site.)

Many investors are thinking that the market is done moving down and on the way up. Is “on the way up” supposed to mean that we are now starting a new Bull Market?

One thing for sure … if the Institutional Index is not “on the way up”, then the rest of the market is NOT going to be “on the way up” without them.

One thing I like about the Institutional core holdings index, is that it can’t get manipulated. And because of that, technical analysis levels are usually “right on” … just like in the old days.

For instance, take the peak of the last Bull Market shown on the chart below. The day the Bull Market ended was an EXACT 61.8% Fibonacci retracement.

So, what is the Institutional Index showing us now?

It shows that very severe damage has been done to the stock market. Its recent low is the worse in a decade and its recent Bull Market high was only a 61.8% retracement of the dot-com bull market high.

More importantly, the Institutional Index shows no sign or confirmation of a new Bull Market rally starting. If fact, the index has not even reached its Bear Market resistance line shown in green.

Before a new Bull Market happens, the index will need to challenge the resistance line, break through it, survive a retest of the lows of at least the 2002 lows, and start to making higher/highs and higher/lows. This is all part of a healthy bottoming process, and we are NOT going to skip all those steps.

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