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Monday, February 2, 2015

Is both Dec. and Jan. down important?

Both Dec. and Jan. were down.  The last time I could remember that happening was back in 2007-08.  We know what happened after that, but what about other instances.  I have never seen any research on this topic that I could remember.  I went back and looked at the last 50 years on SPX (as far as my data goes).  That only happened 7 other times that I could find.  Here are the charts of what happened.

It happened twice within one bear market. That was not a good omen.  Here is the next time.

Oddly, the next two times it happened it was within another bear market.  In the first of those instances price just came off a fresh all time high and the down months were the exact start of a bear market.  The next time it happened was in 1983-4.  While that time was an omen for lower prices the decline was not as severe or as long lasting as the prior two instances.  However, this was after a new secular bull market started in 1982.  This is the last time it happened until the secular bull had ended.  Here is the next occurrence.

We can see it happened in 2002-3 and in 2007-8.  The 2002 occurrence came at the end of a bear market.   It was the only time there wasn't much weakness afterwards.  A new bull market got going in earnest a couple of months later.  The 2007 occurrence once again was near the start of a bear market.

At least now I know why I never saw any research on this phenomenon.  It is unequivocally not a good sign for stocks when prices are at new bull market highs.  The 1983-4 occurrence did not see as prolonged a sell off as the other times.  However, it was the only time it happened in a secular bull market.  Every other previous occurrence happened during secular bear markets.  That is pretty interesting in its own right.  While Wall Street is proclaiming loudly we are in a secular bull market I don't think so.  We do not have the proper price structure and valuation is way too high for a new secular bull.  Besides we cannot know for sure until we get through a bear market without making new lows. 

I have written extensively about warning signs for the end of the bull market.  The only thing missing was confirmation from price.  Now we have price action that could be indicating a bear market has started.  If we are still in a secular bear market as I believe this could be a warning sign of another crash coming.  Extreme caution on the long side seems prudent to me.


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