The major stock indexes traded back and forth the unchanged level today, with a mixed close run on decreasing volume.
Officially, the Dow Industrials fell 0.3% on NYSE volume of 4.9 billion shares, while the NASDAQ advanced a scant 0.04% on 2.3 billion. The leadership profile remains weak, though remains positive for now, with 172 stocks making new highs versus 57 making new lows.
The short term momentum oscillators remain negative, confirming the bearish stance of the AlphaKing Trading Indicator. We have no new trades at this time, as we await a better entry opportunity to add to our short positions and inverse ETFs.
The stock market continues to waffle sideways ahead of the next bear plunge, with the primary question of whether the indexes move closer toward their 50 day moving averages (blue lines in the charts below) before beginning the next round of red ink blood-letting, versus the breakdown to new lows landing without such a continuation of the recent recovery rebound.
If it’s the latter we will be content to hold only ½ a position short in our portfolios - as risk of moving too aggressive here and being proven wrong is too great - though we would become very aggressive on the short side on any move closer to those 50 day moving averages.
With the caveat that there are only two types of stock market analysts - those who don’t know what will happen going forward, and those who don’t know they don’t know - we offered our annual forecast issue back on December 18 last year. And we reiterate here again that as trend followers we do not need to know what will happen going forward to make persistent and consistent profits over the long term. Having said all that we do study history of the markets very closely looking for signs of patterns emerging in the present that are very similar to the past, so here’s a few thoughts more on how we see 2010 and beyond unfolding.
The bull and bear battle for this year can be summed up as the history of cyclical bull markets battling the history of secular bear markets. One says we move to new highs after the expected retest of the 200 day moving averages plays itself out, while the other says 2010 will end like 2008 did, in big bad bear territory.
Cyclical bull markets come around every four years or so, and start with the stock market in the toilet as the economy heads into a recession, with the FED aggressively lowering interest rates. The resulting rally post bear end lasts about three years, and ends with a blow-off in the face of the FED aggressively raising interest rates. This eventually leads to a new bear market ahead of the next recession as the economy contracts in the face of higher FED interest rates. With this cycle repeating over and over again.
Secular bear markets follow the end of every secular bull market and last about 15 years, ending with a massive breakdown to new lows that sees stock market valuations move into the incredibly cheap category. We’re talking single digit P/E ratios, book values close to 1 for the major stock indexes, and double dividend yields.
So our current situation says that the bulls can latch onto the fact the FED remains very accommodative, and no where near ready to raise interest rates aggressively - thus the stock market has the green light to rally for a couple more years - while the bears can latch onto the fact that ten years (assuming a 2000 NASDAQ 5000, S&P500 1500 start) would mark the shortest secular bear market ever, and one that ended without valuations ever coming close to incredibly cheap - thus the bear case suggests the bear market has another five years to go, and one that won’t end till the stock indexes crash so low that valuations reset super-low in a depression scenario, which is what secular bear markets are all about.
Our research shows that the current technical set-up calls for a retest - and eventual break below - the 200 day moving averages for the stock indexes over the next month or so no matter which of the two yin and yang scenarios proves to be the correct one, though after that retest of the 200 day plays itself out the true bull and bear war begins as cyclical bull versus secular bear battle to the death. As we pointed out in the 2010 forecast issue - accessible in the archives - we believe the secular bear case is the most probable one, with a move into deep recession likely once the stock market rally stalled and reversed. That stall and reverse has clearly happened, so the bulls must be extremely cautious going forward, lest they end up on the wrong side of history.
401K investors should be fully invested in a money market fund.
The Index portfolio is ¼ invested in the inverse ETF QID, which gives us a 50% exposure to the short side. Expect more trades over the next few days.
Kevin Wilde, Chief Trading Strategist AlphaKing.com.
