Bear Market Rallies Can Be Deceiving
As we head into trading today, keep in mind the S&P 500 lost 24 points yesterday.
The weekly chart of the S&P 500 has an indicator, known as the MACD Histogram, below price. A good rule of thumb, especially from a short-to-intermediate term perspective, is to trade or invest in the direction of the histogram. When the blue bars are rising it is bullish. Conversely, when they are falling it tends to be bearish. Notice last week (red arrow bottom right), the histogram ticked down which seemed to signal the next leg of the bear market was about to kick off. This week it has ticked back up giving the bulls the upper hand again.
As we mentioned in yesterday’s post and video, bear market rallies can be strong allowing more money to come off the sidelines. A simple support and resistance analysis, coupled with weekly moving averages, tells us a rally back to the 1,230 – 1,280 range on the S&P 500 cannot be ruled out. The most logical area for a potential resumption of the longer-term bearish trend comes in between 1,200 and 1,260. Our weekly high was 1,196.
Markets are cruel. Bear markets can be very cruel. The weekly chart of the S&P 500 Index shows a significant rally from the March 2008 lows to the May 2008 highs. Notice the MACD Histogram was improving during that period (as it is now). Many talking heads made the call that “we hit bottom”, partly due to improving weekly indicators. We have heard similar bullish calls in recent weeks.
What happened after the “bottom had been made”? The S&P 500’s impressive rally was retraced and then some. Stocks dropped 53% after the longer-term bearish trends took over again.
The example above shows the problem of using any technical indicator in isolation. As shown in the table below, the CCM Bull Market Sustainability Index (BMSI) uses a wide variety of ways to determine the probabilistic outlook for the stock market.
What does the Bull Market Sustainability Index tell us now about the longer-term outlook for stocks? It is bearish. In fact, the historical risk-reward profile is one of the worst looking out three months.
