The Case of a Bear Market ...

For all the hoopla in the stock market, 2011 has been an extremely choppy market. At this writing, S&P 500 has gone no where since the start of the year. However the time is finally ripe for a bear break ...

In my last market missive, I talked about some dangerous signs pointing to market internal deterioration, let's review what has happened since May 15, 2011.



Nasdaq made a nominal high of 2887.75 on May 2nd after the relief rally from the Japanese earthquake and tsunami disaster. The high surpassed the 2007 Oct high of 2861.51 (It is simply eye popping to watch how powerful Fed could lift all asset classes by its massive influx of cheap money to the market). From early May to the middle of June, the Nasdaq dived 10% due to the European mess on bailing out troubled Greece. At the middle of June, the Greece problem was put aside and the anticipation of good corporate 2rd quarter earnings started the summer rally in earnest, with some big multi-national US corporations reported solid numbers, including IBM, GOOG, AAPL, BIDU etc. Here comes today, as the debt ceiling debate is over, this market is yet again in a critical juncture, where is it heading? The indices don't tell a full picture.

One striking fact about the last 5 months' market activity, shown in the above Nasdaq picture, clearly demonstrate repeated heavy selling from the institutions. Heavy volume sell off from the top (early march), followed by low volume rally to new highs (Mid March to end of April), followed by another boat of concentrated high volume liquidation (May to Mid June), followed by low volume summer rally. This pattern can be seen in many stocks and sector ETFs, e.g. oil ETFs, XOP, XLE, OIH; metals and ming ETF XME; industrials ETF xli etc. Repeated high vol sell off followed by low vol rally points to market topping process. Smart $$$ is leaving the market.




The internals of the market is rapidly deteriorating. The above picture shows the percentage of Nasdaq stocks above 200MA for the last 3 years. It is clear that the number of stocks participating the market rally since March 2011 shows strong negative divergence. With more and more stocks breaking below 200MA, the indices are only a few percent below their all time highs. What is holding up the market? One pillar (or the single remaining one should I say?) of the strength comes from some big cap tech stocks, AAPL, GOOG, BIDU, IBM, AMZN. When they finally start to top (they have yet to show signs of topping), the flood gate will open.


Looking at the market sectors, financials (XLF) and Semi conductors (SOX) are mired in their bear land; Industrials (XLI) finally breaks down last week. As the pillars of any bull market, these three areas are pointing further market weakness to come.

On the growth stock land, the whole cloud computing stocks are gone (look at RVBD, ARUN, APKT, FFIV, VMW, CRM etc); Some small innovative or niche market growth stocks from the March 2009 bull market are taken to the woodshed (e.g. OPEN, ACOM, PAY, etc). There are some selected retail stocks targeting the American affluents (and a few medical stocks) are still holding up (e.g. LULU, CMG, GMCR, FOSL, TIF, TPX, HLF, ULTA etc), however the names are getting thinner and thinner. (These stocks are yet another fact to know that those rich are less affected by this rapidly polarizing society where poor becomes poorer and rich becomes even richer ... how to protect your family and kids from this wealth zero sum game? learn to invest properly is certainly one way !!!)

How is the market sentiment now? No bears, the latest Market sentiment survey continues to show more bulls than bears, bulls 50%, bears 21% which is a remarkable contrast to Sept 2010, where bull/bear ratio is 40% bears to 30% bull.

As I went to an IBD meetup here in the bay area on late July, 2011, more than 60% of participants are bulls and one bullish argument they constantly cite is the fact that the average bull market length is 3.8 years and this bull market is only 2.3 years old and also the fact that we are in the 3rd year of presidential election which is usually bullish.

Let's look deeper into the length of the bull market. This article was written in Jan 2011, so the current bull market length was shown to be 1.8 years.

Here are some important fact to know, as of the last bull market of 2002-2007, among the 15 market cycles from 1930

• The average duration of bull markets since 1932 is 3.8 yrs (median of 3.6 yrs)
• 80% of bulls lived past their 2nd birthday.
• Barely half saw their 3rd birthday.
• The average gain of these past 15 bull markets is 136.4%; The median gain is 101.5%.
• The last bull market lived less than 3 years is 1987 bull market which lasted 2 years 7 month.

We are now 2 year 4+ month into the bull market. Because the average bull market is 3.8 years long such that we don't have a case for bear market? NO, your conclusion is flawed, the distribution does not suggest you have a strong case.

As I am sitting here in caesars palace in Vegas attending the annual Blackhat hacker conference, I see some hackers constantly refreshing their browsers to read the debt ceiling news on Bloomberg as if the market's softness is purely due to the debt ceiling uncertainties. The fact is the market will go where it wants to go regardless what the solution of the debt ceiling is.

I don't know what will happen tomorrow or a month later. I careless about the news. The price, volume action at hand as of this writing on the indices, sectors, and stocks, however, point to an upcoming bear market.