Friday, August 28, 2009

On the Cusp of a New Bull Market?

While many investors have focused on the fall of 2008 as the critical juncture for markets, stocks had in fact been falling since the fall of 2007. In August of 2007, the subprime crisis first appeared and was quickly talked down by then-Secretary of the Treasury Hank Paulson and Fed Chairman Ben Bernanke. The two brids famously chirped that the crisis had been "contained," though many market insiders were unconvinced.

The major indices reached peaks just two months later, in October, but then began a steady decline until Bear Stearns finally imploded in March of 2009. The point is that the current bear market is not nearly a year old, but closer to two years of age, and that's a long time for bear markets in general. Granted, this one was different and we may not have seen the worst of it - though it's difficult to imagine conditions worse than those which prevailed in the fall of 2008 or late winter of 2009 - but bears of 22, 23, 24 months or longer are not the norm.

As August 2009 comes to a conclusion Monday, we find the indices at the cusp of a potential new bull market and the conditions are present or emerging which could send stocks much higher in the near term. Noting that today's close was the first negative in 9 sessions for the Dow and and the second in nine for the other majors (except for the NASDAQ, which ended the day positive), the indices have pushed and prodded up against considerable resistance, mostly the marks set at the interim tops on November 4, 2009 of 9625 on the Dow and 1005 on the S&P 500. While the NASDAQ has clearly recovered to a far better condition than the other indices, topping the November 4, 2009 top of 1780 by more than 200 points, the others are lagging the younger, more spirited index by a large margin.

Because the NASDAQ is so obviously overbought and the other two indices just above (S&P) or just below (Dow) resistance, investors have been calling for a pullback for the better part of three weeks, though no meaningful breakdown has occurred, precisely because most traders are positioned long at this juncture, in expectation of a short, shallow reversal before taking off to new, higher levels.

Should the Dow surpass the 9625 mark and the transports confirm, Dow Theory tells us that is a signal for a new, bullish trend. It's likely that stocks will outperform all other asset classes for the remainder of the year, once this soft patch of resistance and investor indecision abates. A pullback of 5-15% is probably the best medicine for the markets in order to supply upward impetus, nut this market has demonstrated firm resistance to any sustained downward trend, so it's by no means a sure thing that stocks will go down before they go up. This week was notable in that as soon as the Dow retreated to the 9500 level - on Monday, Wednesday, Thursday and Friday - or thereabouts, speculators jumped in and stocks rallied.

This has put stocks in a pretty tight trading range, but once either 9500 or 9625 on the Dow is breached, the stage will be set for another push higher.

How high?

Figure another 12-15% before the money managers are exhausted and begin taking serious profits. One should not expect a dramatic increase on par with what markets have done between March 9 and today, but rather a sideways trade with an upside bias through the end of the year. It may be dull, but at least it won't be going down.

Dow 9,544.20, -36.43 (0.38%)
NASDAQ 2,028.77, +1.04 (0.05%)
S&P 500 1,028.93, -2.05 (0.20%)
NYSE Composite 6,709.04, -13.27 (0.20%)

On the day, declining issues outweighed advancers, 3581-2814, and new highs trumped new lows, 183-77. Volume was above average, though still in that subdued summertime range.

NYSE Volume 1,391,884,000
NASDAQ Volume 2,396,156,000

Commodities were generally higher for the second straight day. Oil gained 24 cents, to $72.74. Gold was up $11.50, to $958.80, while silver sported a healthy 56 cent gain to close at $14.82.

After Monday's big rally, the remainder of the week was rather inconsequential owing to the factors addressed earlier in this post. Next week will be something of an oddity, with August ending on Monday and Friday likely to be the major swing day as the Labor Department releases non-farm payroll data for August. That bumps up against the very late labor Day three-day holiday weekend, so there will be plenty to think about both during and after the trading.

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