In order to gather some perspective on the current stock market rally, Chart of the Day highlighted the duration (calendar days) and magnitude (percentage gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). By means of illustration, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. “… the current Dow rally (hollow blue dot labeled ‘You are here’) is slightly below average in both duration and magnitude relative to the average 1929-1932 bear market rally (hollow red dot),” said Chart of the Day.
Source: Chart of the Day, May 1, 2009.
As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already above this level. It has to rise by a further 2.1% in order to reach the key 200-day moving average - an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.
Two S&P 500 sectors - Consumer Discretionary (XLY) and Technology (XLK) - have actually just broken above their 200-day moving averages. Bespoke said: “This … signals the end to a long-term downtrend and the confirmation of an uptrend. It’s also a positive for the overall market that two cyclical sectors (one that is extremely tied to the consumer) are the first ones to break above their 200-days.”
Still talking technical analysis, Kevin Lane of Fusion IQ said: “The S&P 500 Index had stalled at the 878 level on three separate occasions over the past five months. However, prices then subsequently gave way to profit-taking and closed back below that level. Only a close above that level would open the way to higher prices.
“On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish Sentiment Survey and the VIX’s deviation from its 50-day moving average have all moderated from constructive levels to more neutral levels. … these indicators are not at levels that would suggest sentiment is overly bullish yet, but their deterioration is enough cause for concern that a corrective wave may occur.”
“All the things are in place for the bear market to have ended,” Anthony Bolton, president of investments at Fidelity International in London, said in an interview with Bloomberg Television. “When there’s a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I’d like to bet against that.”
Remaining across the pond, David Fuller (Fullermoney) put matters in context as follows: “Base formations, confirming not only the ending of a bear market but the beginning of a new bull market, come in all shapes and sizes. The leading stock markets, which generally have better fundamentals, usually form smaller bases before commencing their uptrends, as we have seen with China and a number of other emerging markets from Asia to South America. Fundamentally weaker markets, such as the US and most of Europe, require a longer convalescence before a significant recovery occurs. This explains the new lows in late February and early March.
“This impressive rally is overextended in the short term, so we can expect it to spill over into a reaction and consolidation before long. The recent uptrend consistency will be followed by some choppy action as legitimate fundamental concerns remain.”
The last (cautionary) word goes to Richard Russell, writer of the Dow Theory Letters newsletter: “On the bear market decline, we never saw the great values that usually appear at major bear market bottoms. The ‘great value’ area is the place where I would normally suggest that investors load up with blue-chip stocks. For this reason, I would prefer waiting out this rally or making a limited trade with DIAs [Dow Diamonds ETF] with stops. I continue to believe this is an upward correction in an ongoing primary bear market. I note that many observers are saying that ‘this is a market that won’t go down’. Believe me, all markets go up - and all markets go down.”