Wednesday, March 28, 2012

Looking at the Bull

Trying to determine the status of the stock market at any point in time is difficult at best. When the market continues to rise for a sustained period, we call it a “Bull” market, and when it declines for a period of time, it is considered a “Bear” market. The determining factors in most cases are the interval and rate of movement. On average most “Bull” markets last about 39 months. During a bull market, a correction of more than 10% usually occurs once. The question is whether we are still in a bull market or if it has ended, and are we now entering a new one. This is rather important because it can give us a much better idea of what to expect. The bull market that began in March of 2009 has had two corrections of more than 10% (16% and 19%). This has not happened since 1940. Two indications that the bull market had ended were noticeably absent. The April high should have been preceded by a falling advance-decline line of the NYSE Composite. It wasn’t. At that point there should also have been a persistent rise in selling pressure. Again, there wasn’t. A bear market is one defined as a drop of 20% or more from the high of the bull market. The drop from April to October of 2011 was 19.3% (close but not enough). In light of other considerations, it appears that we are 36 months into the same bull market which began in March of 2009. Because it has aged this long, events in the bull market are beginning to indicate that we are coming to the end. Two major examples are a greater selectivity of stocks being purchased, and larger stocks dominating the increase in values while small and medium stocks tend to see a deterioration in value. We are seeing both of these happening now. Looking at all of the above, it appears to me that we are coming to the end of this bull market. Ed Mallon