Just a Bear Market Rally? | Stock Market Investing

Monday, April 28, 2008 | Home | Andy Mayo

Daily market action has shifted into neutral, with the Federal Reserve Open Market Committee meeting tomorrow, and its official announcement due on Wednesday.  At this point, odds seem to favor an end to the current Bear Market rally that began after the market low on March 17 and another leg down in the current Bear Market.

In recent posts, I've noted that the Volatility, or fear, Index (ticker VIX) has broken an uptrend on a weekly basis.  That's bullish for stock prices.  Unfortunately, we haven't seen a lower low in the VIX, as this chart shows.  It looks like the recent drop in the VIX level may be getting ready for a rebound, a negative for stock prices.

Another indicator I've talked about lately is market breadth, as measured by the percentage of stocks with a bullish point-and-figure pattern and the percentage of stocks above their 200-day moving average.  Looking at these readings for the S&P 500 Index, we can see improvement but no positive breakout, as measured by the daily closing price breaking above its moving average.  The picture is here.  Another factor facing the S&P 500 is strong resistance at the 1400 level.  The market closed today at 1396.  It could be a stall or simply uncertainty about what the Federal Reserve will announce on Wednesday.

So the issue is less what the recent indicators are showing and more about where we stand on a long-term perspective.  One way to view this is to look at the put/call ratio.  When puts outnumber calls, investors are negative about future prices.  The picture for total put/calls and equity puts/calls is quite different, as shown below.


What is striking about the total put/call ratio is that it has been in an uptrend since the end of the last Bear Market, while the ratio for equity-only puts and calls has experienced two dramatic spikes, once in 2004 and again since the 2007 market high.  One conclusion you could draw from these charts is that we entered into a secular Bear Market in 2000 and that the 2003-2007 Bull Market was just a cyclical Bull Market inside a much longer-term Bear Market.

Finally, I mentioned last Friday that the exchange-traded gold bullion fund GLD was right at the "neckline" of a head and shoulders pattern and that if it broke down through that "neckline," it would signal much lower prices ahead.  What happened today?  The price bounced off the neckline and rose modestly.  However, as the chart shows, the 50-day moving average for GLD has rolled over and the longer-term moving average appears to be flattening out.  Both of these could indicate lower prices in the intermediate future. 

Inflation is good for gold prices, so what are some other inflation indicators doing?  Well, the Reuters-CRB Commodity Index has lost its upward momentum on a short-term (daily) basis and the yield on the 10-year Treasury Bond has hit strong resistance at 3.9%.  A rising yield would indicate higher inflation expectations in the future but so far, the yield on the 10-year has not established an upward trend.  So there would still seem to be a question as to whether the Federal Reserve is more concerned about possible deflation -- set off by the terrible condition of household balance sheets in the US -- than inflation.  We'll see which way the wind is blowing on Wednesday.   Charts courtesy of StockCharts.com

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