No Signs of a New Bull Market

We still have not seen enough technical evidence to call an end to the bear market

By Mark Arbeter

The major indexes closed lower for a second week in a row, as the technical picture continues to deteriorate. While the S&P 500 and the Nasdaq remain above their recent trading ranges, we remain cautious and believe the odds favor additional downside action over the near-term.

The presumption by many investors is that a new bull market has started. We still have not seen enough technical evidence to call an end to the bear market. The belief that the S&P 500 has traced out a bullish, double bottom is becoming more hope than anything. We have stated numerous times that the formation will not be complete until the interim high at 963 is taken out. Currently, the case can be made that the S&P 500 is tracing an intermediate-term, double top and that would suggest a move at least back to the October lows.

If the "500" is truly tracing out a double bottom, it would be abnormal to have two straight negative weeks after the second low. During the beginnings of the bull markets in 1932, 1975, 1982, 1990, and 1998, the market went straight up after the second low, blowing right past the interim high and never looking back. This time is starting to look a little different and that is worrisome.

The S&P 500 traced out a wedge formation off the October low and these formations typically have bearish implications. The index also formed a wedge after the July low. Furthermore, on a weekly chart, the "500" has broken below trendline support and this is also a negative. Key support on the downside is chart support at 876 as well as the 860 level, which is a 50% retracement of the advance since the October low. We would become much more bearish if the 860 area gave way on a closing basis as this would set-up another test of the 775 to 800 zone. Until then, the market may just continue to perform in a very choppy manner.

Volume has been below average of late, suggesting a lack of conviction on both sides of the market. The bulls are hesitant to chase the market when it is rising, and the bears are reluctant to increase their shorting activity when prices are falling. This has created a condition of short-term equilibrium for the markets and until that is resolved, the trading range environment will live on.

However, there have been some signs of distribution of late, as our up/down models on the NYSE and the Nasdaq have recently turned mildly bearish. This type of volume action has frequently warned of trouble in the past and it is something worth keeping a close eye on.

Sentiment has turned precariously bullish on three out of the four investment polls we monitor and while this is never a positive, it is especially disconcerting after the market's action over the last couple of years. All of a sudden, investors are embracing the latest rebound in stocks, despite the alarming losses suffered. This just does not make any sense and could come back to haunt the bulls.

The three investment polls that are showing over 50% bulls include Investor's Intelligence, Consensus, and the American Association of Individual Investors. These three polls are a broad swath of the investment community including newsletter writers, the brokerage community, and individual investors. When everyone is sitting on the same side of the fence, the fence will break. This is the first time since January, 2002 that at least three of the four polls were over 50% bulls. The market went sideways for a couple of months and then fell sharply. This also happened in May, 2001, and that represented an intermediate-term top for the market.

The early stages of the major bull markets over the last 70 years share many of the same characteristics. Most of them trace out a major, bullish reversal formation such as a double bottom. Secondly, they all must break above the downward sloping bear market trendline that contains prices during the decline.

Next, the advance after the final low moves the major indexes into a very overbought condition on a short and intermediate-term basis. Fourth, there are very high rate-of-change readings on a 50-day and 100-day basis. Strong upside volume and overall volume are seen in the early stages of a new bull market. New leadership usually emerges from some type(s) of growth stocks.

And finally, and there could be more, a 5-wave advance usually takes place, not the 3-wave advances that have been characteristic of the bear market seen to date. Unfortunately, none of these have taken place of yet and therefore we will remain on the sidelines.

Arbeter is chief technical analyst for Standard & Poor's

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