MARKET DROP IS JUST SHY OF AN OFFICIAL BEAR MARKET AS S&P 500 RETESTS MARCH LOW -- OVERSOLD MARKET MAY GET A JULY 4 BOUNCE
MARKET HASN'T REACHED 20% THRESHOLD YET... A lot was made in the media over the weekend about the Dow Industrials having lost 20% from its October peak which is bear market territory. It is true that a 20% drop from a previous peak qualifies as an "official" bear market. For that reading to be valid, however, I think it should be based on closing prices (and not intra-day). While the Dow Industrials did touch the 20% market intra-day last week, it hasn't done so on a "closing basis". Using closing prices, the Dow has dropped 19.9%. Since the Dow is so heavily weighed down by financials stock, I think a more reliable reading should be based on the S&P 500. Chart 2 shows that the March bottom for the S&P 500 lost -18.6% based on closing values. The S&P is now in the process of retesting that March low. There are two points here that I'd like to clarify. Technically, the market as a whole still hasn't reached the 20% threshold for an official bear market (although it's very close). For an official bear market to exist, the S&P 500 would have to close below its March low. Although I believe that will probably happen, it may not happen over the next week. That's because the market usually experiences a bounce around the July 4 holiday. That's this week.
Chart 1
Chart 2
MARKET APPEARS DUE FOR OVERSOLD BOUNCE ... The proximity to its January/March lows and a short-term oversold reading below 30 by the 9-day RSI line may be enough to prompt a short-term rally attempt this week. That possiblity is increased by the seasonal tendency for the market to bounce around the July 4 holiday which is this Friday. I doubt that any rally would get very far. The 20-day day average in Chart 3 is the first overhead resistance barrier near 1340 for the S&P 500. The Fibonacci retracement lines in Chart 4 show the 38% retracement of the May/June decline also around the 1340 level. Longer-range indicators remain bearish and I believe it's just a matter of time before bear market lows are hit. But the market may have a brief upside bounce before that happens. Once that happens, the media will probably proclaim this a bottom. The market will have to do a lot more than experience a short-term bounce to qualify as a bottom. Bear in mind that the most dangerous months of the year (end of summer to autumn) are still ahead.
Chart 3
Chart 4
FOREIGN STOCKS DON'T LOOK ANY BETTER... Foreign stocks don't look any better than the U.S. In many instances, they look worse. Chart 5 shows the MSCI World Stock Index (ex USA) having fallen -19.9% from its October top to its January bottom. Many foreign markets have already reached the bear threshold of 20%. In Europe, France and Germany have fallen -28% and 24% respectfully. [Britain is down -19.5%]. Among large emerging markets, India and China have lost -35% and -55% respectively. The only foreign countries that have held up better are commodity exporters like Brazil (-12%), Canada (-5%) and Russia (-8%).
Chart 5
20% DOESN'T SIGNAL START OF BEAR MARKET... There's another point that needs clarifying. A drop of 20% does make a bear market "official". However, it doesn't signal the "start" of a bear market. The bear market starts when the market first starts to drop. Arthur Hill and myself labeled this as a bear market at the end of last year. As such, we believe that the March lows will eventually be broken. That would make the bear market official. But it would just be confirmation of the actual bear trend that started last autumn.
