Sunday, November 11, 2007

Bear market - Nah !

The message boards are raging with talk of bear market, recession, Super cycle top et al. Nothing new there. It's what that's been going on over the full length of this bull market.

Emotions aside, i am posting a chart here with an indicator that i use to objectively define a bull and a bear market. Until this indicator turns below zero, there's no bear market, the way i define it. Again, remember this is a long term indicator and should not be used for ST to IT term timing purposes, unless one is ready to take a 15-20% drawdown. Right now we are in a intermediate term correction and it should be respected, if one is trading that timeframe.

Based on this indicator, in the last two decades, there have been three minor bear trends 1987, 1990 and 2000. 1987 and 1990 conincided with minor bear trends and economic softness. 2000 was a major bear market in stocks which coincided with a full blown recession. This indicator signaled a bear market in Nov 2000 and turned back in June 2003, which signalled the end of bear market. It's always better to be late in calling a bear market than earlier. Public memory is short. Those who claim to have called the 2000 top were the same folks who have been calling it since 1995 and some from late 80s. There are a few exceptions who called it in 98 and 99 and were vindicated in 2000. My point is "Don't be eager in calling a bear market" as the bull market topping is multi-year process. It's better to be 6 months late rather a few years earlier as the opportunity cost of not riding the bull market is too much and the associated psychological stress of being early and wrong in calling a top is just not worth it.

Looking at my indicator, during the great bull market of 90s, the first set of divergences started appearing in Oct 1997. We got a decent correction and the Osc moved to new highs. The next set of divergences apeared in July of 1998. We got a big correction and moved to new highs on the Osc in 1999. From July 1999, there were a series of lower low on the Osc with higher highs on indices. The increase in volatility, accompanied by a series of divergences was indicative of a maturing bull cycle. My LT indicators are in a configuration similar to where we were in July-Aug 1999.

Looking at my long term indicators and some divergences on the long term charts, i have to say the BULL market is maturing and in it's final stages. Nothing has changed as far as my LT e-wave count is concerned and i still expect SPX 1800 by 2009, before it's all said and done. My indicators remain in a bull market zone and i have a incomplete wave count to contend with. So the implication is the bull market will continue. Currently we are in a intermediate correction which started on Oct 11. I expect new ATH on SPX once the IT correction is over.

As for the recession talk, it's something that's been going on for the last 4 years. 2004, we were supposed to enter a recession. Then it got moved to 2005. 2006 was supposed to be a no brainer recession. 2007, there was no escape. And here we are in 2007 and the U.S GDP is growing at 3.9%. The emerging markets continue to grow at 9-10%. I am no economic expert. So i will listen to the stock market to signal a recession, instead of listening to the economic professors who have predicted the last few recessions that never occurred!

As for the Super cycle top and Grand Super cycle top and "End of America" arguments, it may not happen in many of our lifetimes.