Friday, August 13, 2010

This Week's Selling Indicates Bear Market Still in Play

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.

All four major U.S. stock indices began to form a bear market trading pattern during July. The rally that started early in the month paused the formation of that pattern, but didn't reverse it. Then the selling this week added more evidence that stocks are in a bear environment.

The most basic definition of a bear market is a 50-day moving average trading below the 200-day moving average for one or more stock indices and the 200-day moving down. Frequently, people only look for this pattern on one index such as the S&P 500, but that isn't enough. All the major indices - the Dow Industrials, the S&P 500, Nasdaq and the Russell 2000 - should have this pattern before a bear market can be declared.  You might also add the Dow Jones Transportation index to the list as an additional confirmation.

In early July, the simple 50-day moving average fell below the 200-day for both the S&P 500 and the Dow Industrials. Then in the middle of the month the same thing happened on the Nasdaq chart. By the end of the month, the Russell 2000 also experienced this cross (sometimes referred to the cross of death by technical analysts). However, stocks had been rallying since early July and the Russell's cross was very tentative. The 50-day barely dropped below the 200-day and then traded in tandem with it for two-weeks. The selling this week put some space between the two lines and prevented the 50-day from rising back above the Russell's 200-day.

So the 50-day crosses are in place for all the four major stocks indices. The falling 200-day moving averages are still missing however. This line is still rising, although just barely, for the Dow Industrials, S&P 500, Nasdaq, and the Russell 2000. Watch for the 200-days to turn down. The 50-day has also not crossed the 200-day on the Transportation Index. When this happens and the 200-day moving averages start declining, the bear market picture will be complete.

While a large number of economic reports for the last two months have shown a faltering U.S. economy and the Federal Reserve has confirmed that things look gloomy, stocks nevertheless managed to rally for 5 weeks in July and early August. Investors should keep in mind that there is a major election in the United States in early November. Other hard to explain bullish rallies are therefore possible until that time, so be prepared for anything. Reality eventually triumphs in all markets however and that favors the bearish view.
Disclosure: No positions

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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