The second leg of a bull run is here.
As I've talked about in previous blogs it is easy to make an argument, for the secular bear market we find ourselves in. The good news is that the markets do not go straight down, or straight up. I am going to make the technical case, for the beginning of the second leg up in a cyclical bull market.
The recession began in October of 2007, and will probably end on a technical basis in the current quarter. This recession by any historical measure, is one of the longest recessions in modern history. Typically the stock market acts as a leading indicator for future economic activity. Although the exact number of months the market leads is a debatable point, and variable itself. The consensus view, is the market leads the economy an average of 6 to 9 months.
We have witnessed two major declines in this decade as a result of a over-confident Fed and incredibly ignorant government polices. Both of these declines have had a similar pattern in forming a market base in which to catapult from. Typically the bottoming process that stock markets work through, last an average of six months to one year. Both bear markets this decade, have lasted nine months.
We have essentially been in an extremely volatile trading range, from October of 2008 until the end of July 2009. On March 6, 2009 the market bottomed, and began its incredible rise from 666.79 to the June 11 high of 956.23. The June 11 high was an important technical level that was achieved. We then had a shallow correction into July 8 of 869.32. The market came roaring back and closed above the important psychological level of 1000 on the S&P 500. The first important test at this level was to close above 1007 on the S&P 500, and stay there for a week or two.
It is important to compare this cyclical bull market rally relative to past cyclical bull market rallies. There have been seven cyclical bear market rallies that occurred over the past century similar to this one. Let's break down these rallies using the analogy of a three legged stool. The first leg of the three legged stool, was the stock market move from the March 6, 2009 low to the June 5, 2009 level. The second leg of this cyclical bull market rally, when compared to past rallies, can be significant in its move higher from current levels.
The seven second leg rallies that most resemble our current market , occurred in 1908, 1938, 1904, 1974, 1921, 2003, 1933. According to historical data gathered from the Stock Market Almanac, Gannon Global Financial research data, and Thomson Reuters, the second leg of these rallies were major moves higher.
Four of the 7 rallies cited above had second leg moves of a minimum of 46%. Three of the seven had moves of a minimum of 23%. Given the violent decline we had in the market from September of 2008 until the low of March 6, 2009, I'M inclined to believe the second leg up of this rally will resemble a V-shaped stock market recovery. The next level of resistance is 1255 on the S&P500. Which was the point the violent decline began in September of 2008. My expectations is that this next move will take a minimum of two months or on maximum 10 months.
It is important to remember that technical analysis, or fundamental analysis, or any combination of other analysis used, is not an exact science. No one could know for sure the next move in the markets, as the markets are more complicated and wiser than any individual or organization.
However if you believe that history is a guide to help predict the future as I do, then the examples used in this blog are valid.
Tell me what you think?
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