Thursday, July 23, 2009

More bull market evidence

It is often hard to adopt a bullish stance after an extended bear market ends. This is even more true after a year long panic like the Panic of 2008. The relentless barrage of bearish news and commentary in the media affects even the most dedicated contrarian.

Sometimes an antidote can be found by looking at charts which depict the market's behavior from different points of view. If you have read my book you know that I like to use the S&P 500 composite index as my principal market indicator. This index appears as the middle chart above this post. The 200 day moving average of the S&P 500 is still dropping sharply. The conservative contrarian is waiting for this moving average to turn upward by 1% before moving to an above-normal stock market allocation. It looks like this move is still some months away. But by looking at the market from other perspectives the conservative contrarian can prepare himself mentally to make the switch at the right time with confidence.

The chart immediately above this post shows the Nasdaq composite index. It is behaving more bullishly than the S&P. It has already moved well above its October 2008 high point while the S&P is still 70 points below its corresponding high. The Nasday is more than 20% above its 200 day moving average while the S&P is only 12% above its moving average. The Nasdaq moving average has actually leveled out and appears ready to turn upward - there is as yet no sign of similar behavior in the 200 day moving average of the S&P 500.

The top chart presents the most bullish picture of all. It is a chart of the cumulative total of the difference between the number of advancing and the number of declining issues each day on the New York Stock Exchange. The blue line on this chart is the 200 day moving average of this advance-decline line. It has already turned slightly upward. The advance-deline line itself has risen above its August 2008 high, a level corresponding to the 1315 level in the S&P 500.

I think these charts show that the tide has turned. A new bull market has started. It will probably last through the end of 2010 and carry the S&P closer to its 2007 high at 1576 than anyone now imagines. But I think it is generally a mistake to invest based on forecasts. With this in mind the conservative contrarian should continue to wait for an up turn of 1% in the 200 day moving average of the S&P 500 before moving more money into the stock market.

A word to the aggressive contrarian. You took an above-normal long position at the 685 level near the March low point of 666. Follow the plan outlined on pages 133-34 of my book. Wait for six months to elapse from the March 6, 2009 low (i.e. wailt until early September). Then start watching the 50 day moving average of the S&P 500 (blue line in the chart). Once you see the 50 day moving average drop by 1% from a high point for the swing up from the March low reduce your long postion back to normal levels.

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