The bear market isn’t over.
The rally we’ve seen over the past few months has certainly been strong… The S&P 500 is up 19% from its October low – with much of that gain occurring in just the past four weeks.
Stubborn bears that remained aggressively short stocks during that time have been crushed.
They’ve been forced out of positions. And reluctant bulls have resorted to chasing stocks higher into overbought conditions for fear of missing out on the next great bull market.
This is what a bear market rally is supposed to do…
It shakes bears out of their short positions and coaxes bulls into new long positions just before the bear takes another swipe.
And it’s during that final swipe of the bear claw that we get the capitulation necessary to end the bear market and start a new bull market.
Traders who were in the market back in 2002 and 2009 understand this…
The bear markets caused by the bursting of the “dot-com” bubble, and the Great Financial Crisis devastated investors. They ended only after the average person on the street – the retail investor – threw in the towel and swore off ever venturing into the stock market again.
Folks couldn’t look at their account statements. They turned off the financial TV networks. They avoided any discussion of the stock market. And in the most severe of cases, they ended their own lives.
That’s what happens at the end of a bear market.
For the most part, that hasn’t happened… yet. The sell-off that ended last October was rough. But it wasn’t a capitulation.
We didn’t get the sort of panic selling that’s necessary to put the bear to bed.
Yes, we did get some isolated situations where the rush to “get out” created some fantastic bargains. Those stocks probably have indeed seen their bear market bottoms.
But most stocks – including the broad stock market averages – have lower to go. The bear is gearing up to take another swipe. And I suspect that “mauling” could start soon.
Let me explain…
Take a look at this chart of the NYSE McClellan Summation Index (NYSI) mapped along with its 9-day exponential moving average (EMA – blue line)…
This Summation Index is another technical tool for measuring market momentum.
Whenever the NYSI rallies above its 9-day EMA, it indicates that momentum is turning higher – and that’s usually a good time to buy stocks.
Whenever the NYSI falls below its 9-day EMA, momentum is waning. That’s usually a good time to sell.
The red arrows on the chart show the sell signals over the past year. Here’s how those sell signals lined up with the S&P 500…
All four of the previous sell signals led to an immediate decline in the broad stock market.
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Some declines were mild – like the 6% drop in December.
But the sell signals last April and last August were much more significant – swiping more than 600 points off the index.
The NYSI just generated another sell signal. There’s no telling if this signal will lead to a mild decline or if we’re headed for something more significant.
Either way, though, there’s a good chance stocks are headed lower in the weeks ahead.
Best regards and good trading,
In today’s mailbag, a Jeff Clark Trader subscriber thanks Jeff for another successful trade…
I love the “leave-your-wallet-at-home” trades! On the last one on NEM, I made a nice gain by closing a bit early. I see you have one coming up but would love to see more! Thank you.
– John R.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].