Friday, July 17, 2009
New Bull Market
Here is a daily chart of the S&P 500 covering the last year or so. Those of you who have read my book know that Wednesday was an important market event for the aggressive contrarian trader.
On pages 130-135 I described the market tactics I think an aggressive contrarian should follow. These tactics differ according to whether the aggressive contrarian believes the S&P 500 is in a bull market or a bear market. As I explained in my book, the simplest way to make this distinction is to compare the daily close in the S&P 500 to the 200 day moving average of these closes. A bull market is signaled when there is a close that is 5% higher that the 200 day moving average. This occurred for the first time in 18 months this past Wednesday when the S&P closed at 933 when its 200 day moving average was about 875.
At the moment, as I explained this this previous post, the aggressive contrarian already has an above-average long position. He did his buying in early March near the S&P 680 level. As I explained in that post and in my book the aggressive contrarian is waiting for September and for the first downturn in the 50 day moving average of the S&P that occurs after the first week of September from a new rally high. That will be his signal to reduce his long position from above normal to normal bull market levels.
How far might this bull market carry? As I explained in my book, historical precedent tells us that most bull markets last at least 20 months and carry the S&P 500 up at least 65% from its bear market low. Using this as a minimum expectation we would expect the S&P to advance to at least 1100 and reach its high in November 2010 or later.
The conservative contrarian is still waiting for an up turn in the 200 day moving average by at least 1% before he increases his long side exposure to stocks to above average levels.