Wednesday, March 25, 2009

Bear Market Rally Or New Start?

One of the toughest questions to answer when we go through a down market is where is the bottom. Supposed experts attempt to rationalize and explain, but the bottom line is that actually stating unequivocally that "this day" is the bottom is tough to do. However, there are many so-called experts who are stating we are now in a bear market rally. Wikipedia states "an increase in prices during a primary trend bear market is called a bear market rally. A bear market rally is sometimes defined as an increase of 10% to 20%. Bear market rallies typically begin suddenly and are often short-lived. Rob Carrick of the Globe and Mail explains the advantages of getting in now in spite of the possibility this swing is short lived. Markets run in cycles and even down markets have upticks. The real question becomes how should you react? Is this sudden surge in global stock prices the end of the bear or a trap for people who want to get in cheap. Only time will tell.

What I use to define whether or not a market is in a bear market is simple stage analysis. I break the market up into four stages - basing, bull market, topping, and then bear market. It isn't hard to identify what stage a market is in. Here is where the lingo gets very technical.

The simplest way is just to look at the market in relationship to its long-term 150 and 200-day moving averages. These averages represent the average stock market close each day over a length of time. Once the market breaks below them and stays below them for 6-8 weeks, this indicates markets will almost always turn down. A bear market then begins and throughout the duration of the bear market these moving averages become resistance throughout the rest of the bear market. The opposite also remains true - once the market breaks through the moving averages, then we are usually in a bull market. Most technical analysts (translation - really boring people who never see the light of day) look for the markets to break through the 50 day moving average as a positive sign. At that point, the 50 day average becomes the new "market bottom". Some analysts prefer to look at the 100 day average. They believe that this is far more accurate. Here's an example form the close of markets on March 23rd for the TSX.

The blue line represents the TSX over the last six months. The red line is the 50 day average. Theory is that once markets break through the 50 day average, that becomes the new bottom. Sure didn't work in the latest case. But look at the 100 day average. It's only this latest market uptick that pushed over the 100 day average. Could this be the sign that the worst is over? Let's look at the 100/200 day moving averages.

Based on past history, the market has now created a new bottom and the new "high" will be in the 10,500 range (the 200 day average). We are just below 9,000 on the morning of March 24th. Most pundits predicted that the TSX would reach between 10,000 and 11,000 for 2009. Based on the above evidence, this looks like a good guess, but we shall see.

Stay well and pay it forward.

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