Market Commentary:

Market Commentary:

Stocks whipped up and down today on very mixed earnings reports as traders try to posture themselves ahead of next week’s GDP report, unemployment and FOMC meeting.

I think the market is expecting some improvement in the GDP report, unemployment to worsen and that the Fed will recognize the weakness in the economy but forecast improvements.

How traders posture themselves ahead of May is also a big factor here. So next week is likely to be a very volatile week, with the potential of another stab at the highs of April and perhaps new monthly highs over April in early May---then watch out.

The question as to whether the bear market has turned into a new bull market is on everyone’s mind these days.

Every day I am constantly weighing this issue, from a fundamental, technical and cyclical perspective. Given the fact that we are experiencing the worst recession of my lifetime, I want to make sure we get this right, especially in this kind of volatility.

A retest of the lows of last March, even if we set up a higher low could prove extremely costly to you, so we need to evaluate the risk reward ratios very carefully as we head into the month of May.

From a fundamental perspective, the general consensus is that the worst of the recession has already past us, but a recovery is not expected to begin until the spring of 2010.

For argument sake, let’s assume this is a correct estimate of how things will unfold. How far can the stock market go up at its present pace when the recovery is a year away and if Roubini is right, no more growth in 2010 than about 0.5% on the GDP?

Humans think in linear terms. They see the stock market up impressively in March and slightly higher in April and think that this is going to continue.

Shouldn’t we be thinking of the stock market, though, in cyclical terms, with the stock market advancing ahead of expectations, then checking itself relative to reality, retracing back to the mean averages?

Intermediate-term cycles suggest we are getting close to a top. Buying is becoming belabored. We are not seeing bullish volume.

What I do see is an overbought intermediate-term cycle that is converging towards a seasonal cycle high as we approach May. Our proprietary indicator, the Fidelity Select Family Stochastic Oscillator is showing a six month cycle high, with %K at 93 and %D at 91.

In the following chart we measure the market from how many stocks are trading above their 50-day moving averages as an oscillator on the NYSE.

Notice, we appear to be making an intermediate-term high, with the number of stocks above their 50-day moving averages starting to show to signs of topping.

Notice, the MACD at the top of this chart is beginning to roll over as investors grow leery of the sustainability of the market.

If this does roll over, the weekly ranges for the indexes will turn down and the next intermediate-term correction will take off.

Keep an eye on the weekly gold charts, which appear to be setting up for an intermediate-term advance, now in strongly oversold territory. Gold is a default investment as investors sell equities and buy gold, so this is a telling indicator right now for the next few weeks.

There are some indicators that have turned positive and need to be recognized.

Let’s examine market breadth. Over the last three weeks, we have seen the McClellan Summation Index move above zero for both the NYSE and the OTC. That’s constructive and hints that market internals are better than we’ve seen at any time since this bear market began.

The new high/new low indicator against a 10-day moving average in the month of April is just now starting to see new highs slowly starting to out pace new lows, but just barely though.

This is encouraging but if meaningful buying fails to follow through to sustain this advance in May, momentum will cave in on itself and market breadth will quickly reverse again.

Speaking of momentum, the 14-day RSI levels are just barely above 50% on the daily charts. That is constructive, but if we are at the top of the intermediate-term cycle it won’t take much selling to drive the RSI below 50%.

Everyone has their own definition of what a bull market is. What I subscribe to is whether the price of the market indexes can display enough strength to trend above a 200-day moving average.

Can the 50-day moving average trend above a 200-day moving average? Can prices of the indexes trend above their monthly middle Bollinger Band lines?

I have a real problem with the stock market on this basis. This bear market has been so severe, with price so discounted to the important averages that the technical repairs required are huge.

Yesterday, I showed a comparison of the 1980-1982 bear market and argued we could see a similar pattern of market behavior going forward, but that there was one huge difference in this bear market pattern from the 1980-1982 bear market.

This is the difference of prices relative to the 200-day moving averages.

In 1982, the S&P 500 by late April, early May had tested its 200-day moving average and even then the market retested its March lows and ultimately broke the lows before bottoming in August of 1982—then the bull market started.

There is no comparison to that now. We are so far discounted from the 200-day moving averages it is truly frightening. Why is this important? Because it means you aren’t going to attract meaningful buying at this depth of discounting. And that means we are apt to see momentum fail again until this spread narrows---and that is just going to take time.

This is why I question the V-shaped bottom idea being promoted now. I don’t see it here given this heavy discount.

Another example is that the direction of the 50-day moving average is trending flat right now. Trending flat is much better than descending but it will take time for the 200-day moving average to catch up with it if it stays flat. That also suggests we are apt to back and fill until the spread narrows.

As I have repeatedly said, we need to see how the stock market looks at the next intermediate-term bottom, not at this intermediate high.

The most bullish technical pattern when the intermediate-term cycle turns negative is to see price continue to move up at a slower pace or a sideways pattern develop on the weekly ranges. This would be a very bullish consolidation pattern because prices would hold well above the March lows, with the bears unable to break prices down during a seasonally negative cyclical period.

The next best scenario would be a partial retest of the March lows but setting up a higher low. This would produce an “inverted head and shoulder” pattern, with the head in March, but a higher shoulder. This would create a successful test of the lows and would usher in an even more powerful rally to follow in the second half.

The worst scenario is if investors start to panic again as the seasonal cycle rolls down this summer. In an ugly scenario, the S&P 500 could fall down to the 500-600 range, which is where the downtrend line connects with the November and March lows.

I am hoping for the best scenario to develop but we have to plan for the worse scenario, given the worse recession seen in 60 years. Anything can happen.

I recommend playing it safe, until we see what comes out of this next intermediate down cycle and how the market reacts to it.