Tuesday, November 25, 2008

S&P 500 bear - the pause that refreshes

The bear market is not over by a long shot. I believe we have begun the bear market rally or "bounce" that will take us into the spring and then we will have another wicked leg down. This is not "just another recession." You don't crash the entire world banking system with a routine recession. Housing bubbles are notorious for causing protracted, long recessions when they pop. Just ask Japan. Why is this so?

The banks get heavily leveraged when real estate is involved, even when people are willing to put 20 or 30% of the purchase price down in cash. The current bubble had people literally taking a check from the bank to move into a house with 103%, 105% and in some cases up to 110% loan to property loan value. The banks are screwed and they're still not admitting to half the losses they will need to take before this mess is over.

The S&P 500 chart also gives some clues that this bear market is not over:

I believe the bottom is in, but it's only a temporary or intermediate-term bottom. We still need to go through at least one more significant leg down to complete a 5th wave in Elliott wave terms (a charting technique) and set up a momentum divergence before we can have a year or longer cyclical bull market rally occur. When momentum goes this far (using the MACD and RSI indicators on the chart above), a second reaction back to test these levels is likely and the momentum indicators will probably not reach these same momentum lows the next time they "try", though the price should set a lower low. This will set up a price and momentum divergence on the chart and get we tea leaf readers ready to go long for more than a few weeks or months. The bear market is not over but it won't last forever.

The chart below compares the Nikkei Japanese stock bubble of the 1980s (in red) with the Nasdaq stocks bubble of the 1990s (in black). Gives you an idea of what to expect ahead. History doesn't repeat exactly, but it sho' do rhyme.

So, it's opportunistic transient bull for now, but the bear market is alive and well. If you're playing the markets long it should only be for a short time (i.e. 2-4 months), as the real money to be made is when this bear market rally is over and it is time to go short again.

Wikinvest Wire