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Thursday, October 16, 2014

Is the bull market over?

Back in the June article Signs of a bull market top I wrote about how there were so many things that were consistent with the end of a bull market.  The only ingredient that was missing was topping patterns on the indexes.  Since then the topping patterns formed and are now as clear as can be.  At the Sept. high in SPX many key indexes like the mid caps and the NYSE composite joined IWM in making a lower high.  While COMPX made a new high along with SPX almost 50% of its stocks were down 20% or more.  That was clear technical evidence of a market weaker then it appeared.  The market pundits proclaim there is no recession in sight.  That must mean no end of the bull market is in sight.  However, we know from history that is not true.  The market almost always tops before the recession starts.  Sometimes many months.  We have topping patterns in all indexes now.  We don't have the margin debt figure for Sept. yet, but given the divergence in the indexes I suspect it won't be at a new high.  At the 2000 top the margin debt peak came in March and the final high came in early Sept.  That was a lead time of about 6 months.  In 2007 margin debt peaked in July with the final high in Oct.  That gave us a lead time of about 4 months.  This year the margin debt peak so far happened back in Feb.  That was 8 months ago.  If that peak holds it would be the longest lead time.  Unfortunately we won't know if Sept. was higher until late this month.  With the selling so far this month even if Sept. is  higher it will likely be the peak.

Starting in July the market internals started really falling apart.  I wrote about this many times.  As SPX kept making new highs the internals kept getting weaker.  At that same time oil started a 20% move down and the dollar started flying up.  The only time oil has dropped that much that fast has been coincident with severe economic weakness and usually recession.  Interest rates have been falling all year calling into question the true strength of the economy.  Globally there is clear evidence of a slowdown.  While it has not hit the U.S. data yet it certainly could.  If we have learned anything over the last 20 years is that we truly have a global economy.  It is going to be extremely difficult if not impossible for the U.S. to keep plugging along ignoring the global economy.

We have all the things that have preceded past bear markets.  More and more stocks are breaking down and now the major indexes are starting to reflect that.  I think the best case scenario for bulls now would be a retest of the high then down into the bear.  With all the economic weakness already apparent that might not happen.  I suspect we will rally to a lower high at some point and then the bear starts in earnest.

There is no easy way to tell if a bear market has actually started.  The initial sell off form the final looks much like any other severe bull market correction.   Generally speaking most bull market corrections make their final low within 6 months.  If the market makes new lows after that the odds start shifting to a bear market.  Breaking the monthly 18 SMA is a pretty good indication also.  While the 87 crash saw SPX drop more then 30% the final low was made in only 3 months.  There was no recession and it was not really like a true bear market where new lows are made long past 3 months.  At any rate it will take quite some time before we know for sure. 


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