Tuesday, June 1, 2010

One Way to Tell if We Are in a Bear Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Bull markets usually go up the first four trading days of the month. After giving a strong negative signal in May, investors should be watching this indicator in the early days of June. A second negative signal would be a confirmation that a new bear market has begun.

Money tends to get reallocated at the beginning of the month. The behavior is more pronounced at the beginning of the quarter and most pronounced at the beginning of the year. In bull markets, much of this money gets allocated on the buy side for stocks. In bears markets, a higher percentage of investing money will go to safe haven assets. So in a bull market the first four trading days (not five as many sources claim) of the month tend to see a nice rise in stock prices. The first couple of days are almost always positive.

Even in strong bull markets, not every month has to have an up move in the beginning days. Every so many months, investors are likely to grow cautious and take some profits. The bulls should regain control for the next several months however before profits get high enough again so that investors want to take some money off the table. So far, the rally that began in March 2009 has managed to just hold together.

The first negative signal for the rally was given in July 2009 for the Dow Jones Industrial Average. The next month was positive though and then another negative signal was given in early September. This was followed by a number of months that when stocks were up in the first four days. Then February 2010 gave another negative signal. March and April were once again OK and then came May.  The flash crash happened on the fourth trading day of May and the market was already down before it occurred. May was an ugly month.

Four negative signals on the first four trading days of the month indicator are a lot in just over a year. It indicates a rally that has weak underpinnings (as does the falling volume on the Dow during most of the rally). We still have not as of yet seen negative signals two months in a row. Maybe we will by June 4th.  If we do, it would be strong evidence that a new bear market has begun.

Disclosure: None.

Daryl Montgomery Organizer,
New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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