A CYCLICAL BULL IN A SECULAR BEAR
NOT ALL BULLS ARE THE SAME... As usual, there's a debate going on as to whether the current market advance is a bear market rally or a new bull market. Our position, which we've expressed many times before, is that we're in a "cyclical" bull market within a "secular" bear. We've also shown Chart 1 before to make the point that the "secular" bull market that started in 1982 has ended. Using a log scale (which is recommended for long-term analysis) it can be seen that the support line drawn from the 1982 bottom was broken over a year ago. To us, that means that the super bear has ended. That's not all bad news. That's because bull markets can occur in secular bears. They're called "cyclical" bull markets. That's the good news. The bad news is that cyclical bulls in secular bears aren't as big as cyclical bulls in secular bull markets.
Chart 1
WHAT A CYCLICAL BULL LOOKS LIKE... Chart 2 is a monthly S&P 500 chart showing the breaking of the (red) down trendline that lasted for thirty months. That together with the pattern of "higher highs and higher lows" ended the bear phase of the secular bear and started a bull phase. The question is how far will this cyclical bull run and for how long? Chart 2 superimposes Fibonacci retracement lines on the previous bear market. A 38% retracement yields a potential target to 1060; a 50% retracement to 1140. We suspect the current rally will carry somewhere in between those two resistance lines. The bars to the left of the chart are our "price by volume" indicator. The bars show where the heaviest trading took place during the market's decline. The biggest par straddles the 50% retracment line. That should also provide stiff overhead resistance.
Chart 2
HOW ABOUT A 50% RECOVERY... A 50% rally off the lowest low yields a target to around 1150. That last number is courtesy of Ned Davis. In an article published in Barron's last weekend. Mr. Davis (one of the most respected analysts in the business) pointed out that cyclical bull markets in secular bears gain 50% on average and last just about a year. Pricewise, a 50% recovery is within our target zone. Timewise, it's a matter of which bottom to measure from. The two logical time targets are July and October. From a seasonal standpoint, July tops are more common than October tops. A third possibility is next March since that's where the lastest rally started from.
Chart 3
