This is still a young bear market

On a relatively quiet day, this might be a good time to step back and take a longer range look at the market. I have several indicators that I use to help gauge the primary trend in the markets. They have kept me and my clients from suffering the typical bear market losses seen in every bear market since I started this work in the mid 1980’s.

There is virtually no one around who needs to be educated on the signals for a bearish decline. We have all seen the signs and experienced the pain in our pocketbooks and portfolios. And many of you have become experts at what to watch for next time.

But there may be a bunch of you out there who are taken in by the dramatic rally we have seen from March to the April close. Perhaps you even feel that you have been left out on the major advance opportunity.

There are plenty of political and economic leaders and spin analysts who would be pleased for everyone to believe that the worst is finally over. Some of you may even want to believe that we have truly turned the corner in the stock market. Are any of you asking the question about how to join in the new bull market that looks to be underway?

Before you sign on the dotted line, take a look at some historical data. I have three indicators that have been pretty close to perfect at pegging bearish and bullish trends over the last couple of decades. They have protected my clients for decades. We will discuss them today.

As is typical in life, sometimes the simplest things provide the most profound guidance. If you look at the chart you will see a simple 12-month moving average of the monthly prices for the S&P 500.

To use this indicator properly you must essentially ignore prices during a month and concentrate on the closing prices for each month. That is why I have chosen a line of closing prices as opposed to showing high, open, low candlesticks or lines. It is the closing price for the month that is significant.

This simple indicator detected the beginning and ending of the 2000-2003 bear market, the beginning and ending of the 2003-2007 bull market and the beginning of the 2007-2009 (2010?) bear market.

Check the dates closely when the monthly prices crossed below and above the 12-month moving average. Pretty dang good, huh?

I have also included a couple of other indicators for you analytical buffs out there. The MACD indicator is just as precise in detecting bearish/bullish trends as is the CCI (12-month period) indicator.

I like the CCI particularly well, because it is so clear. If the CCI indicator I have illustrated above crosses above or below the zero mark you have a trend change occurring. And notice that it does not have any false moves, though it came close during the summer of 2004.

Once the CCI crosses to a bullish or bearish indication it oscillates in the bullish or bearish area until the next switch occurs. On this chart the green is bullish and the orange is bearish.

There is one thing that is sure in life and in this stock market. There will be prosperous times and there will be times of distress. Prices will advance, sometimes for a long period, and prices will decline, often for a longer period than anyone expects. Prices will rise and fall during both bear markets and bull markets.

So where are we today, per this chart?

If you look at the 2000 bear market you will notice that the CCI indicator made four separate (orange) stabs into the -150 to -200 levels, coinciding with four different rally attempts during that bear market. This is fairly typical.

During a bear market there are usually several bear market rallies before the last one holds and the market switches to a bull market.

Ignoring all the horrible fundamental data that is out there, and knowing in your heart of hearts that this bear market is either the worst on record or the second worst on record, how many bear market rally attempts do you think it will take before a real switch to a bullish trend takes place? It’s going to be more than two.

The talking heads say that the advance since the March lows (in terms of percentage) is technically a new bull market – maybe even one of the strongest bull markets to be seen.

But bull markets of the past have been just ahead of economic recoveries of impressive magnitude. Do you see an economic recovery of impressive magnitude in the coming months? If you do, please tell me why.

I didn’t think so.

According to the CCI indicator above there have been only two bear market rally attempts so far in this bear market. The CCI indicator line, while heading in the right direction, is not near the zero switch point. We could still see a significant advance and not make the cross over.

Be patient. Prices go up and prices go down. There will be many opportunities ahead, especially with such a dramatic decline.

In fact, check out the price line. Look where the 1550 high line is at. Now look where the 666 low was reached in March. And finally, look at where prices are now.

There is a lot of upside ahead. There is also a lot of time ahead – time for this bear market to live a more full life, to experience at least a couple more bear market rallies, before he becomes long in the tooth.

You know that the economy will not be turning around very impressively for many months, perhaps even years.

If any thing, this market looks due to head back down or trade sideways for a while.

Believe me, this is still a young bear we are dealing with.