While we often tend to look at fundamental analysis to determine the direction of the stock market, such as heading for the “fiscal cliff” or problems in Greece, it is sometimes a good idea to check on technical analysis. This blog will give an overview of where I believe technical analysis appears to be pointing at this time. On average, a bull market lasts about 39 months, sometimes longer or shorter. The current bull market began in March 2009 and reached its 39 month point in June of this year. For three months, from August until recently, some of the equity indexes reached new highs, seeming to show a robust equity marketplace. During this same three-month period, signs indicated that all was not well with the majority of underlying equity issues. The S&P Mid Cap and Small Cap indexes did not significantly break out of the highs from 2011, and selective buying was occurring. Selective buying indicates that buyers have become picky, and is usually a harbinger of a downturn in the markets. The NASDAQ Composite was showing greater signs of weakness as it dropped steadily. All of this produced what technical analysts call a topping period, where some issues continue to rise while most have hit their peak and are headed downward. What some long-term investors like to look at are the 200-day moving averages of various indexes. The idea behind the 200 day moving average is that it gives a clearer picture of the long term patterns of the market represented in an index. The daily movement on the NASDAQ Composite broke well below its 200-day moving average in October. The Dow Jones (DJ) Utilities average, DJ Transportation average and DJ Industrial Average have all broken below their 200-day moving average. Increased selective demand, coupled with the drop of most averages below their 200-day moving average and the impact of the weakening European markets on the U. S. markets all point to an extended bull market. What we saw last week was likely a correction in the market and not the start of a bear market. Given the extended nature of this bull market, caution should be exercised.
Ed Mallon
