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Can Stock Market Trend Analysis And Market Timing Help You Survive A Bear Market?
By Geoff Green | April 14, 2008
You bet it can! Stock Market Trend Analysis combined with Market Timing and our weekly list of our best stock picks is probably your best bet to keep you on the right side of the investing environment.
Fears are growing that this recession is going to be much longer and deeper than has been predicted so far. There is little doubt remaining about whether the US economy is in a recession, the question is how painful and long the downturn will be.
Given that the actual start and finish of a recessionary period can only be determined in retrospect, it’s painfully obvious to long-term stock market investors that stock prices are still extremely vulnerable to more breakdowns than rallies.
It appears that many of the sharp stock market rallies - the rally that happened on April Fools day this year for example - may have been really short squeezes in disguise.
In a short squeeze, short sellers get caught with too many open positions in a sharp stock market rally - they are forced to cover their positions - in turn contributing to a sharp increase in stock prices for the day.
The missing follow through days of increasing stock prices is evidence of this phenomenon. It’s easy for these type of rallies to fool investors into thinking that a real stock market trend change has occurred.
However, given the ongoing credit turmoil, dropping home prices, contracting mortgage lender guidelines, increasing commodity prices which will increase inflation rates, there is a growing fear among some economists that the recession will be particularly bad.
“We just can’t believe it’s going to be short. The question is how bad can it get? The situation is moving more towards severe than towards mild,” said Allen Sinai, chief global economist for Decision Economics.
According to the National Bureau of Economic Research, the firm that officially determines when recessions begin and end, the last two recessions (2001 and 1990-1991) each lasted 8 months.
None of the postwar recessions as shown on the above table have been shorter than 6 months. It is realistic that given the current economic and world situation that this recession will last at least that long. So assuming this current recession started in April 2008 and that it will last at least as long as the average length of post-war recessions - it appears that this one may have at least 9 months or so to go.
So what do stock prices do in a recession? In many cases the stock market trend turns up before the recession officially ends - usually when corporate profits start to increase. As an ominous sign it appears that corporate profits are still decreasing as of April 2008.
Take a look at the following monthly chart of the Wilshire 5000 stock market index.
This chart includes the activity of stock prices during the most recent recession from March 2001 through November 2001. The stock market lost value from early 2000 to early 2003 - a 3 year bear market - can this happen again?
Sure it could, but will it? That is the question! Because no-known can possibly know the answer to that, we must turn to the only entity that can help us determine when it is prudent to invest on the long side in the stock market again.
Let’s see what we can ascertain about the stock market trend today by looking at the right side of the chart.
You can clearly see that the stock market has broken the uptrend that started in 2003. Although the stock market has not yet closed at the lower Bollinger band or below, it could be just a matter of time before it happens.
The Relative Strength Indicator has worked its way below the 50% line, the Full Stochastics is still heading down, the CCI indicator is firmly bearish. Notice that during the last bear market all these indicators predicted the drop in stock prices accurately.
Today’s MACD indicator is firmly bearish and to date has shown no sign of reversing back to an upwards trend.
During the last bearish stock market trend note that this indicator didn’t get into positive territory for 3 years! However, when it did return to positive territory it marked the end of the bear trend and a move to a powerful bull trend that lasted for almost 5 years - until the most recent trend reversal in November of 2007.
Your goal of course is to sit on the sidelines in cash - or go short - during periods of decreasing stock prices.
Let us do the stock market trend analysis and market timing and we’ll tell you when it’s safe to own stocks again. In the meantime we’ll show you how to take advantage of bear market rallies and shorting opportunities as they reveal themselves.
As the author and owner of this article, you have my permission to publish these postings & articles electronically or on your own Web site, free of charge as long as the following by-line and functional Internet link is included in its entirety.
Written by Geoff Green, at http://www.profitable-investing.com Copyright 2008.
Topics: Bollinger bands, Daily Commentary, MACD, bearish, indicators, inflation, relative strength, stochastics, stock market strategy, technical analysis |
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April 16th, 2008 at 11:24 pm
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