Trader’s Narrative

Well, is it?

That’s what a lot of people are wondering (which has the built in assumption that this is a bear market rally and not the real thing). To get some perspective on this, I decided to look at a long term view of the Nasdaq Composite Bullish Percent Index.

If you’re unfamiliar with this type of index, it is created by looking at what percentage of the components of an index (in this case the Nasdaq Composite) are exhibiting a certain bullish pattern according to point and figure charting. To see how I use this as an indicator, check out: How to Time the Market with Bullish Percent Charts.

Here’s the long term chart of the Nasdaq Composite compared to its Bullish Percent Index:

By the way, I used the Nasdaq Composite because it is very broad with about 3000 components and it excludes a lot of the junk found in the NYSE (CEFs, convertible debentures, ETFs, preferred stocks, rights, warrants, etc.) which can skew the index, especially because of their sensitivity to interest rates.

The chart shows the tech bear market and the latest one which started in late 2007. Almost every single bear market rally top was flagged by the Bullish Percent Index (BPI) - indicated by the red down arrows. It also did a good job of finding exhaustion points during the good times - with one important exception.

The red box shows the span of time that the BPI went above 60% and stayed there. During this time, the normal relationship we otherwise see between the two charts broke down. The only argument I could think of to explain this, is that this time period was the start of a new (albeit short lived) bull market. All kinds of indicators, breadth readings and overbought metrics went into the red zone and stayed there as the stock market powered ahead - seemingly oblivious to them.

The other difference between this most recent bear market and the last is that the counter rallies we’ve seen this time around have been much less powerful than before. As you can see marked by the orange down arrows, they don’t even reach 50% BPI.

The latest BPI reached slightly higher than 62% - that the highest since early 2007 and before than, early 2004. Obviously, this latest run up is different from the previous ones. Going back to 1996 (not shown on the chart) it was rare for the Nasdaq Composite Bullish Percent Index to reach or exceed 50%. So this level is clearly significant.

So what we have to consider is, if this is just a run of the mill bear market rally, then it is over. But if it the real thing, similar to what we saw in 2003 (the red box) then the market will confound everyone and keep going higher.

According to the long term market direction guide known as the Coppock Curve, the Nasdaq is already on a buy signal (from last month). But since it tends to whipsaw much more than the Standard & Poor’s 500 Index (SPX), I’m waiting until it gives a signal. There are only 8 more trading days left in the month and if the S&P 500 can stay above 874 (3.74% lower from Tuesday’s close) then the Coppock Curve curls up.

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Tuesday’s rocket ride was attributed to a news trifecta:

Rep. Barney Frank, made public that the SEC is considering the reinstatement of the uptick rule. Bernanke’s mused on more flexible accounting for banks to allow them to replenish their capital base and to prevent them from limiting their lending in a downturn (as they are now). Finally, Pandit made wildly optimistic statements about the profitability of Citigroup (C), based on the first two months of the year.

Whatever the actual rationale, Tuesday, March 10th, was yet another Lowry 90%-90% days. Of course, if you’ve been paying attention, this is nothing new. In fact, if we just count the times that we’ve fallen to a 52 week high, only to zoom higher on a Lowry 90-90 up day, it would be the fourth time:

The last time was just a few weeks ago (February 25th) when I asked cynically, Does Yesterday’s 90-90 Lowry Up Day Change Anthing? If you’re unfamiliar with what a 90%-90% Lowry up day is, follow the previous link for an explanation.

Of course, this bear market has been remarkable for its lack of significant counter rallies. So it isn’t surprising that although there is a lot of chatter about a bear market rally, not a lot of people actually think it will materialize.

Believe it or not, we’d gone 288 days without a rally (that lasted 80 days or more). That is among the longest stretches ever. It is only topped 3 times in market history since the 1920’s:
Continue reading ‘A Close Look At Yet Another Lowry 90-90 Up Day’

Today’s viciously down market made me think of how this bear market would stack up compared to the previous one we just went through a few years ago.

As you can see from the chart below, the last bear market had six major counter rallies. Two of them were 10% and the rest more than 20% each. After all was said and done, the market fell 49% from its peak in 2000:

In contrast, we’ve seen a much more brutal decline in this current bear market. As of today’s close, the market is down 50% from its October 2007 peak. But while the drawdown is similar in magnitude, it has occurred in a much shorter time frame. While it took the S&P 500 index 1833 days to once again reach a new high from the depths of the 2002 bear market bottom, it has taken it only 489 days to lose it all:

And we’ve only seen four major counter rallies, with the last one being the largest. So what does this mean?

For one, before a bear market is spent, it needs to suck in as many bulls as possible. It does this by fooling them into believing that the worst is over; by dangling the alluring bait of hope before their screens. What better way to convince you that it is safe to venture into the market than by showing you a tantalizing +20% rally?

But this bear market seems to be different. It is relentless. Merciless. And while sentiment would suggest that people are actually complacent, we haven’t seen much push back from the bulls.

A 50% decline is certainly a psychological ‘line in the sand’. Beyond that, from a technical point of view, it is an important level at which reversals take place. And yes, it is also a Fibonacci level. But of course, this doesn’t mean that the market has to do anything.

Compared to other markets, the US has held up quite well. For example, Ireland’s ISEQ index has already fallen 78% from its peak in early 2007.

Believe it or not… welcome to the new bull market. Calculating from the depths of the November spike down (741.02) the S&P 500 has now rallied 20%+. Which means that technically, we are now in a very young bull market. The bear market lasted around 408 days and cut the index by more than half (52%).

Whether it survives to become a powerful bull or dies stillborn as merely an especially strong counter rally, is another question. One that at the moment no one can truly answer. But we’re seeing more and more signs that things look ok:

• historical 10 year returns
• Ford valuation model
• previous bears coming on board: Fleckenstein, Leuthold, Ritholtz, Kass
• etc.

Here’s another: the McClellan Summation Index has now curled up to form a bottom. And from a level last seen in 1998:

We may get confirmation of this nascent bull market in a few months time from other sources like the Coppock curve. But until then, only the brave (or foolhardy) should apply.

The picture shows one of the famous “Osborne” bulls that dot the landscape in Spain. They were originally used as massive billboards to advertise a sherry made in Jerez (a region in Spain) by the name of Veterano. After a law prohibiting the advertising of alcohol the government tried to take them down but there was an outcry from people who had by then come to see them as a cultural icon. A compromise was reached were the red lettering of “Veterano” was covered with black paint.

Interesting factoid: many of the statues have a couch or mattress directly under them as the folklore goes that couples that um… couple, under the sign will receive the fertility of a bull and conceive a child.

Here’s a chart of an index of stocks which recently rallied more than 65%. Can you guess which one it is?

For the answer keep reading…

Continue reading ‘Guess Which Index Rallied 65%’