TimingCube - Bear with us? - Bear Market, Nasdaq Composite, Bear rally

Follow TimingCube »

	Turbo Model				Classic Model


		Share

Cartoon of the Week

Current Signal Performance

Turbo Signal	Trade Date	Turbo Model Returns (Long & Short Strategy)
			Nasdaq 100 (QQQ)	Russell 2000 (IWM)	S&P 500 (SPY)

Classic Signal	Trade Date	Classic Model Returns (Long & Short Strategy)
		World	Nasdaq 100 (QQQ)	Russell 2000 (IWM)	S&P 500 (SPY)

Market Update

It has been another volatile week on Wall Street. On Monday, the Dow soared 200 points in the morning as investors went bargain hunting after four weeks of losses. But by day end, almost all gains had evaporated as Europe's debt crisis took the front stage one more time. Tuesday the bulls were finally in charge, not even scared by the earthquake that hit the East Coast in the afternoon. The Dow gained 322 points, one of its best day of the month. The market pulled a little higher on Thursday, but was much more hesitant as everybody waited on the Fed's meeting at Jackson Hole on Friday. Thursday, the market opened down after Apple announced that its famous CEO, Steve Jobs, was stepping down. News that Warren Buffet will invest $5 billion of Berkshire Hathaway's cash in Bank of America did not restore confidence in stocks. Later in the day, a rumor that Germany would lose its AAA credit rating made things worse. The Nasdaq finished the day down almost 2%. Stocks opened lower on Friday following growing pessimism in Europe and some disappointing GDP data. The long awaited statement from Ben Bernanke made things worse at first, as many investors were hoping for some immediate action from the Fed. However, the general sentiment quickly turned around as investors regained more and more appetite for stocks, finishing the week on a very positive note.

Stocks finally ended their losing streak with the S&P 500 (SPY) , the Nasdaq 100 (QQQ) , and the Russell 2000 (IWM) gaining 4.73%, 6.20% and 5.87% respectively for the week.

The World portfolio posted a more modest 2.60% gain for the week. With an active Classic Model Cash signal, the World approach calls for staying in cash if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs from our world ranking. Please go to the Classic Model "Description" page for details.

Our Classic Model remains on a Cash signal. Our Turbo Model issued a Sell signal mid-week.

Trend Timing School

Bear with us?

While the perennial bullish pundits and other government mouthpieces want us to believe that the latest market rebound marks the end of the recent correction, we need to step back and realize that we are probably in the early stages of a bear market, and as we have mentioned it in previous articles, it is imperative that we take measures to protect ourselves.

Formal bear market definitions vary widely but, the most common one is a price decline of 20% or more on major indexes. Looking at the recent market bottom from August 19^th, the Nasdaq Composite , the S&P 500 and the Russell 2000 are down 18.9%, 18.0% and 25% respectively from their highs in May of this year. The Dow Jones Industrials has held up somewhat better by dropping only 15.7% from its peak. So yes, we are still a little shy from our formal definition of a bear, but it surely smells like it.

Another traditional bear market indicator is the crossover of the 10-day and 200-day Exponential Moving Averages (EMAs), and all major indexes have met that test. From a charting point of view, for those who prefer the visual approach, we offer the Nasdaq Composite index in Chart 1 below which leaves little doubt as to where we are when looking at it from a long term perspective. The uptrend line which had been in place since 2009 providing support for the bull market has clearly broken down, as it has for other major indexes. Also, earlier attempts to break through the 2007's highs have obviously failed, marking the end of the previous bull rally.

Chart1: Nasdaq Composite breaking down

Bear markets are famous for one day wonders, dead cat bounces and other bull traps. Most investors would not guess that the strongest one day gains all occur during bear markets. The many 4% jump we observed earlierthis month were perfect examples of the upside volatility bear markets can produce. The bursts of hope and optimism which frequently accompany bear market rallies are legendary. Bear market rallies are to a bear market what a correction is to a bull market. Inverse to corrections, bear market rallies are most often defined as an increase of 10% to 20% from an intermediate low. They tend to be very sharp, sudden and short-lived.

A bull trap can be triggered by any number of false signals suggesting a reversal of the declining trend when, in fact, the market will resume its decline. Unlike its Classic counterpart, our Turbo Model is trying to profit from these sudden market swings. This may look risky at first and some of us do not have the stomach for this somewhat wild ride, but it usually pays off nicely as shown on our Results page.

Analyzing the 19 bear markets since 1914, we find that on average they lasted one and a half years and generated losses of 36.6%.

We are not making any forecasts. The recent double bottom formation could well be the real deal and be strong enough to reverse the mid-term trend and trigger a new Buy signal for our Classic Model. It could even keep going to end this bear market as the shortest and shallowest in history, and go on to set new bull market highs. But the odds do not favor such a scenario.

During bear markets investor psychology reverses. The fabled "buy the dip" attitude gives way to "sell the rallies". Contrary to what we have grown accustomed to during the bull market, in a bear market the odds are that:

Support levels will be broken and become overhead resistance
Rallies will fail to set new highs or change the trend
The bear market will not end soon

During bear markets smart traders and professional money managers like our own MarketTrend Advisors apply their talents to find intermediate discretionary profit-taking opportunities and re-entry points, but most of us are best served by sticking with the program and the signals to the letter, whether it is the Classic or Turbo model. Volatility and emotions run too high in a bear market to improvise.

FAQ of the Week