Tuesday, November 22, 2011

Are We In A Bear Market?

Technical analyst John Murphy used the following chart recently to argue that we are in a bear market.  The basic definition is that when the number of stocks above their 200ma's is over 50% it's a bull market, when it is less it's a bear market.  Mr. Murphy uses 40% and 60% as demarcation lines.  When the number is greater than 60% it's a bull market, less than 40% it's a bear market, and between 40% and 60% it's a correction.

There's a lot of truth to what he is saying, however, it doesn't let us know if we are close to a bottom or far away from one.  Unfortunately, there are a lot of different opinions about that right now. The extreme elliott wave camp is calling for a major selloff in a 3rd of a 3rd of a 3rd wave down that could begin any day now after a brief bounce.  This is nothing new as this call has been made many times.  Perhaps they will be right this time, but there are a number of factors working against it.

The NYSE McClellan Oscillator closed at a level today that is associated with intermediate term bottoms.  It can go lower, but that will simply increase the likelihood of a sharp rally.  The pattern of the decline so far is hardly a textbook impulse, and all of the stock indexes are not in agreement.  The VIX is forming a triangle pattern that could go either way.  An upside breakout would probably coincide with some panic selling, but a downside breakout would indicate that the worst is over.  Even if there is an upside breakout, the triangle pattern suggests it will be brief and lead to the conclusion, not the continuation, of the selling.  Finally, we are entering the positive year of the presidential cycle.  A repeat of 2008 when the presidential cycle rally inverted is not likely.

So altogether, even though the situation is serious, there are reasons to believe that it will be resolved positively.

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