Monday, July 5, 2010

Russell 2000 and S&P 500 Confirm 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.

The S&P 500 gave a bear market signal on July 2nd; while the small cap Russell 2000's decline reached bear market territory.

All the major U.S. stock indices had significant losses last week and Friday capped it off with more evidence that stocks are no longer in a bull market. From intraday peak to trough, the Russell 2000 has lost 20.2% so far. The definition of a bear market is a 20% loss.

The S&P 500 signaled it would be joining the Russell soon with its simple 50-day moving average falling below its 200-day. This is the classical technical definition of a bear market. Mathematical inevitabilities indicate that the S&P's 50-day will be falling sharply in the next two weeks putting more distance between it and the 200. The 200-day itself is still slowly rising and will have to turn down to complete the bear trading pattern. The S&P 500 should be close to a 20% loss when that happens. It has already lost 16.7% peak to trough in the latest sell off.

The Dow Jones will join the S&P 500 in giving a bear market signal by July 7th at the latest. The Nasdaq will follow the Dow shortly thereafter. Ironically, the last major index that will have a 50-day, 200-day cross will be the Russell 2000. It will obviously be anticlimactic when it happens.

Both the Russell's bear market loss and the S&P 500's bear trading signal were foreshadowed by the first four trading-days of the month indicator. Stocks sold off in the beginning of May and June and two months in a row indicates a bear market. Stocks have sold down the first two trading days of July so far, even though the day before the July 4th holiday has a high probability of being bullish. At least a small rally is quite likely in the next two days however. The Dow Industrials have sold off seven days in a row as of Friday. The last time the Dow sold off for eight consecutive days was in October 2008 at the height of the Credit Crisis. Conditions now would have to be worse than they were then for a nine day sell off.

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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