ORA 60MIN

SENTIMENT NUMBERS

The bears moved deeper into hibernation this week with their lowest reading since 3-Apr-87, more than 22 years ago. That year saw five more months of gains, with the DJ Industrials moving from 2,335 in April to a high of 2,709 in late August. That action preceded the crash that October. These fleeing bears did not move into the bullish camp, as their number declined too. Instead there were more editors moving to the correction camp. There are lots of skeptical bulls out there and that is better than a lot of roaring bulls.

The bulls were down to 51.1% from 52.2% the last two weeks. That was their highest since December 2007, when their number was retreating from 62.0% shown at that Octobers all-time market high. A year later at the first bear market lows the bulls had slipped to just 22.2%.

The bears were down to 15.6% from 16.7%. Their April 1987 reading was 14.5%. At the market highs in October 2007 the bears were 19.6%. A year later, the bears reached a fourteen year high at 54.4% when few editors were positive for equities.

Advisors classified as correction were up to 33.3% from 31.1%. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment and vice versa. The 35.1% reading from three weeks ago was the highest since the 35.3% from 3/13/92

The averages are now on a six-session winning streak, though daily volume is well-below average and few stocks are showing daily P&F chart changes. In addition, we see fewer than half of our forty-six sector indicators with an upward direction and positive chart formations. Those negative divergences are worrying some of the advisors causing the shifts to the correction camp. Markets do climb a wall of worry and editors looking for corrections are worried bulls".

The difference between the bulls and bears was 35.5%, unchanged from last week and bearish. The spread was 40% in Oct-07.

The 10-week average of the "bulls over the bears" [eliminating the correction] hit 72.0%. That is its highest since July 2007.

UUP 60min

OIH 60min

GLW 60min

SENTIMENT NUMBERS

Overview

The holiday season is almost upon us and some newsletter editors use these two weeks to take a break from their publishing schedules. In addition, last week's trading again showed the primary broad indexes moving up to test overhead resistance and pullback, as they have done repeatedly over the past two months so other advisors felt there was no reason to change their opinions. Those factors resulted in a week with unchanged readings for all three sentiment categories, a somewhat rare but not unprecedented result.

Markets began this week with solid gains and we finally saw breakouts to new highs for the NASDAQ Composite and S&P 500. Technology shares are showing leadership in this latest move higher, the DJ industrials are lagging behind and still trade below 10,500. Our recent comments have noted a high level for the correction camp [short-term bears] and looked for upside index breakouts to shift some of their number into the bulls. That move may now occur and we could shortly see excess optimism around 60% that occurs around the time of a major top.

The bulls remained at 52.2%. That is their high since December 2007, when their number was retreating from 62.0% shown at that October's all-time market high. A year later at the first bear market lows the bulls had slipped to just 22.2%.

The bears were again at 16.7%. That is just above early December's 16.5% level. That was the fewest bears counted since June 2003, shortly after stocks rocketed up from the previous bear market lows in 2002 and early 2003. At the market highs in October 2007 the bears were 19.6%. A year later, the bears reached a fourteen year high at 54.4% when few were positive for equities.

The advisors classified as correction were again 31.1%. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment and vice versa.

The difference between the bulls and bears was 35.5%, remaining at its highest level for the current market rally, a negative signal. The difference stood at 40% in Oct-07.

One reading that did change was the 10-week average ratio of the 'bulls' divided by the sum of the 'bulls & bears'. That figure eliminates the correction advisors. This week it is overbought territory at 70.8%. That is the highest level for that reading since 27-Jul-07 when it read 71.5%. That was about three months before the all-time market high in October 2007. Overall, this figure suggests some additional market gains may occur in the near term but markets may peak in the first quarter of 2010 and then correct from there.

VIX 60MIN

SPY 60min

Overview
This week's data included a new twelve year high for the advisors projecting a correction, along with lower readings for both the bulls and the bears. As things stand, the indexes continue to flirt with 2009 highs. Pullbacks last week was brief and followed quickly by new buying. However, we have noted a narrowing of the participation. Fewer industry sectors are rallying and the measures of individual stock activity are slowing substantially from the initial index highs attained in the summer.

The bulls were down slightly to 50.0% after last week's 50.6% reading, which equaled their September high. Both are still up nicely from the start of November, when a market pullback saw their number drop to 44.4%. The advisors continue to show a major sentiment shift from a year ago when the bulls were just 22.2%. That was almost a twenty-year low going back to 15-Nov-88 when the bulls were 21.1%.

We continue to see fewer and fewer bears. They were just 16.7%, down from 17.6% the previous week and 26.7% the first week of November. That is the least bears since 13-Jun-03 when we counted them at 16.1%. Again we note a major shift over the last year from 54.4% in Oct-08.

Advisors classified as correction rose to 33.3% from 31.8% a week ago. This group is mostly bullish but they look for an intervening market retreat before they will commit new funds. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment and vice versa. This is the highest reading since 5-Sep-97 when they were 33.9%.

The long-term bears are at their lowest level in over six years, while the short-term bears (those for a correction) are at their highest level in over twelve years - a very unusual pattern. The bulls are also well below where they were at the market peak in October 2007. This signifies there are not a lot of raging bulls out there. But there are also many advisors who would like to become bulls if the market pulls back. As the markets often confounds expectations, we could see a year-end rally to new highs that could force the correction camp to capitulate and buy on strength. That, we think, could mark the top.

The difference between the bulls and bears was 33.3%, up just 0.3% from last week and another bearish reading. That last time we had such a large negative difference was in late 2007, just after the all-time high in the DJIA, pushing the spread over 40%.

Bullish Themes

“Daily Commentaries:

Nov-19: I was happy with my numbers because they saw the decline to be net bullish. Once again the bears will have to wait. It's not going their way.
Nov-20: My bullish numbers abound. Here we saw 5 OBV 'higher downs' but only 1 OBV 'lower down'.
Nov-23: Technically stocks are rising because they are following their technical signals which are bullish. The bears have no legitimate bearish signals.
Nov-24: Seem to be right on the verge of a huge year-end run-up of several hundred points.” (25-Nov-09):

Joseph A. Granville's The Granville Market Letter, PO Drawer 413006, Kansas City, MO 64141 (800-876-5388)


Correction/Bearish Themes

[Correction Theme] “Market Summary:
1. Hints of quality spreads deteriorating suggest a counter-cyclical equity correction.
2. Bond Barometer is only one component from a bearish signal. Inflation Barometer
rises to 90%. Despite that, a final short-term bear market rally is likely.
3. The Dollar frustrates bull and bear alike. We're sill waiting for a resolution.
4. Gold is getting frothy but no technical signs of a peak, except the shares fail to confirm
the new gold high.
5. The Chinese (FXI) and Russian (RSX) ETF's violate their bull market trendlines for relative
action against the World Index.
6. Japan's ETF (EWJ) relative line is at a multiple year low. Is a crisis developing as a prelude
to the end of the 21-year Japanese secular bear market?” (December 2009)

Martin Pring's InterMarket Review,4830 Sweetmeadow Cr, Sarasota FL 34238 www.pring.com

[Bearish Theme]

“Trading over the latest two months shows a notable loss in upside price momentum and increasing deterioration in market breadth and volume indicators. In contrast to the indices weighted by large US multinationals that benefit from the weakness in the U$, the broadly based indices such as the NYSE Composite and the Russell 200 failed to make new higher highs last week.

Our last issue featured a chart showing the bearish divergence of NYSE Upside/Downside Line from the NYSE Composite. The same divergence has developed in trading on the NASDAQ. The NASDAQ Composite, until recently among the top performing indices, also shows deterioration in price momentum since the index made the intermediate mid-September highs. That is, when the 14-day RSI last matched the high in the index.

Last week the new highs in the large cap indices such as the DJI and the S&P 500 failed to be confirmed by the NYSE A/D Line, an indicator that until mid-October, has the led the NYSE price indices. Another non-confirmation of last week's new highs in the price indices was a shrinking in the number of stocks hitting new highs.” (December 2009)

NASDAQ 60MIN

XLB 60min

SPY 60min

DOLLAR COLLAPSE/ BEARISH FOR THE MARKET????

I don't know at all that it will start to decline real fast from here..just thinking it could happen. If it starts to crater that will cause instability and fear. Markets can handle a slow decline and acutally like it...but fast gets people real concerned. Gold will soar even more as a safe haven in that event and world banks will try even harder and faster to diversify their foreign reserves which will mean more of a move away from the dollar into stronger foreign currencies and gold which may start to feed on itself. Some of the foreign central banks that have propped up the dollar seem to be getting cold feet. Instead of buying just dollars for their foreign-exchange reserves, they're diversifying into other currencies. The countries that reveal the composition of their reserve holdings put 63% of their new reserves into euros and yen according to an analysis by Barclays Capital (BCS). "Their incentive is to try to do stealth diversification". If we get a crash now they may be thinking get me out of here at any price. A dollar crash will further hurt us and other countries for many resons...hurts foreign economies..could cause trade wars..etc...A much lower dollar hurts our banks etc. My thinking is anytime you create a situation of fear and surprise that is not good for the markets in general. We will see if it happens and if I am right. One thing that is happening also is that short term rates have plummeted even more and that is hard to believe..but that is hurting the dollar...fear is still there in the market imo. What is your take?

SPX 60min chart

SOLF 60MIN UPDATE

SENTIMENT NUMBERS

Overview

Further yearly highs for the DJ Industrials caused a big rise in the bulls. Conversely, there was a plunge in the bears, to their lowest level since June 2004. The Dow just missed hitting 10,500, but it has been a rally with the “generals” (averages) moving ahead, but the “soldiers' (most stocks) not following along. Volume patterns have also been negative with many large traders on the sidelines. There were also another 400 stock buying climaxes which are suggestive of trading at tops.

The bulls rose to 50.6%, up from 46.1% last week and 44.4% before that. That new reading equals the bulls at the September peak and is just below the high at the end of 2007. The advisors remain very optimistic but we still haven't seen that final surge that achieves dangerous levels around 60%. Those were last seen in October 2007 when the record market readings were accompanied by 62.0% bulls.

There was also a sharp drop in the bears to 17.6% from 21.3% and 26.7% over the previous two weeks. That was a very quick 9.1% drop to show a large opinion shift by this group of editors. That was the fewest bears counted since 25-Jun-04 when they numbered 17.4%. June 2004 marked the end of a six-month consolidation following the strong rally off the 2002/2003 bear market bottom.

Advisors classified as correction fell to 31.8% from 32.6%. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment and vice versa. The reading last week was a 12-year high of 33.9% on 25-Sep-97.

The difference between the bulls and bears expanded to +33.0%. That is negative and moving in the wrong direction. The spread was 42.4% at the October 2007 market top.

SENTIMENT NUMBERS

Averages completed a second consecutive positive week on Friday to achieve new 52-week highs. The advance was convincing enough to noticeably shift the advisors.

The bulls moved up to 49.5% after dipping to 47.2% the previous week. They have still not equaled their mid-August peak of 51.6% despite the higher levels for the markets. The next few weeks could see more earnings reports exceeding forecasts and that could drive the markets still higher. It may prove timely if increased optimism accompanies any additional market rally. We associate bulls at 55%-60% with market tops, so watch to see if those levels are achieved. They were last shown at the end of 2007.

The bears declined to 23.1% after reaching an eleven-week high at 26.4% a week ago. The bears are still above the 19.8% reading from mid-August. A reading below 20% typically occurs near a top. The mid-August reading was the fewest bears since the all-time market high of October 2007 when their number was 19.6%.

Advisors classified as correction rose to 27.4% from 26.4%. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment. The correction range for the last five weeks has been 28.9% to 25.8%.

The advisors show a major shift from the bear markets lows in October and November 2008 and March 2009. Those bottoms had the bulls at 22.4%, 23.1% and 26.4% respectively while the bears were 54.4%, 49.5%, and 47.2%. Note that the sentiment extreme occurred ahead of the final bottom.

The difference between the bulls and bears expanded to +26.4% after narrowing to +20.8% last week. That latter level had almost fallen out of the bearish zone. Sentiment readings remain bearish.

$FTSE WEEKLY

$CAC WEEKLY

FDX WEEKLY

SPX 15MIN CHART

INTERMARKET ANALYSIS.... WHY IGNORE IT?

BREAKDOWN IN BOND YIELD MAY BE BAD FOR STOCKS ... One of the catalysts behind Thursdays heavy stock selling was the breakdown in Treasury bond yields. The 10-Year T-note yield fell below its July low to the lowest level in more than four months. Bond yields are an indicator of confidence in the economy. When investors are optimistic, they buy stocks and sell Treasuries. That pushes bond yields higher. When they're more pessimistic, they sell stocks and buy Treasuries. That pushes yields lower. So the direction of Treasury bond yields has some bearing on the direction of stocks. That's been especially true over the last two years. The weekly bars in Chart 1 compare the trend of the 10 Year Treasury Note Yield (TNX) to the S&P 500 (green line). At least two things are apparent. One is that bond yields and stocks have usually trended in the same direction. The second is that bond yields have tended to change direction first. Bond yields started dropping during the summer of 2007 several months before stocks peaked. Bond yields started bouncing at the start of 2008 and anticipated a stock rebound that spring. After falling together during the second half of last year, bond yields turned up several months before stocks. Chart 2 shows bond yields turning up in January of this year two months before stocks' March bottom. Bond yields peaked in June, however, and have been weakening since then while stock prices have risen. That "negative intermarket divergence" grew more serious with yesterday's breakdown in yields.

COMPARING TREASURIES TO JUNK ... One of our readers asked whether Treasury prices or junk bonds gave better warnings. I think it's better to use both of them together. Investors buy high-yield (junk) bonds when they're more optimistic and Treasuries when they're less so. In fact, both are giving warning signals at the moment. Chart 3 shows the 7-10 Year Treasury Bond ETF (IEF) breaking out to the upside on Thursday on strong volume. Chart 4 shows the Lehman High Bond ETF (JNK) falling on heavy volume. Both of those trends show more investor caution. [Investment grade corporate bonds also fell heavily on strong volume]. If Treasury prices continue to rise, and junk bonds drop, that would be a more serious warning on the economy and stocks. It's also useful to compare the two bond classes. Chart 5 is ratio of JNK to the IEF. Junk bonds underperformed Treasuries during the second half of 2008 (when stocks were falling), but bottomed in March (along with stocks) and has been rising faster than treasuries since then. In other words, investors favor Treasuries when stocks are weak and embrace junk bonds when stocks are rising. Chart 6 gives a closer view of the JNK:IEF ratio. This week's sharp drop in the ratio is an initial warning of investor nervousness. A drop below the September low would be a more serious warning that investors are starting to abandon risker corporate bonds and starting to favor safer Treasuries.

AMZN

$XOI PRINTED POS DIV IN THE FIRST HOUR OF TRADING, BOUNCE WAS EXPECTED!!

LOW WEEKLY MACD CROSSED

VIX 60MIN REASON WHY I DID NOT PICKED UP MORE SHORTS TODAY

Advisor Sentiment Table

GONE SURFING, WAVES ARE GOING OFF!!!! BEAUTIFUL DAY

AMZN, 5 WAVES UP W/ NEG. DIVERGENCES

Advisors Sentiment

Although the major averages pushed higher again last week there was very little activity amongst the newsletter writers. The numbers of bulls and corrections pulled back a little bit while the bears were up less than 1%.

The bulls counted 47.8%, down from 48.3% last week and 51.6% two-weeks prior to that. Those readings were the highest for the bulls since the end of 2007. Markets reached all-time record highs that October when the bulls were 62.0%. By the end of that year the averages were still within 5% of the peak but the bulls had retreated to the low 50%s. Sentiment most often shows movement away from its extremes prior to the overall market action.

The bears were up slightly to 24.4% from 23.6% the previous week. They numbered as few as 19.8% two weeks before that. The October 2007 high showed a similar bear level at 19.6%, with readings in the mid-20%s over the following couple of months.

Advisors classified as correction dipped to 27.8% from 28.1%. This group is mostly bullish but they expect an intervening market retreat before a rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment.

The difference between the bulls and bears continues to narrow, now at 23.4%. That was down from 24.7%, 26.5% and 31.8% the previous three weeks. Readings above +20% are bearish. At the March 2009 lows the spread was -20.8%; a bullish signal that the markets had turnaround potential.

The recent advisory sentiment levels have negative implications for the future although they don't mean an immediate market drop. That do show markets are trading at the area of a potential top and that risk has increased. That is the opposite of the readings barely six months ago when we counted just 26.4% bulls and 47.2% bears, when the averages were achieving their early March lows. That showed risk had declined to make buying shares attractive.

Sentiment readings remain bearish, but they have improved over the last three weeks.

$WTIC Daily

OIL remains below Resistance..... As Wall Street is calling for Inflation, Im calling for Deflation based on this chart.....

More stocks tagging Fib on Weekly charts, Watch VALE if gold reverses this week.....

$BKX

SPX Daily, Expecting higher prices. Next Target 1060 Gap Resistance

FCX weekly

CHL Weekly

CHL Daily

$BDI/$SPX

SENTIMENT NUMBERS

Overview
Despite an eight day winning streak for the DJ Industrials the number of bullish advisors slipped a bit and there was a sizable increase for the bears. The bears rebounded after one week below the 20% level, a reading not seen since October 2007. A few editors noted that September is one of the worst months of the year for stocks. It is also followed by October, which has seen a number of unpleasant market occurrences over its history.

The bulls moved down to 50.6% after reaching a twenty-month high at 51.6% the previous week. That was more than double the reading of 22.2% shown at the first bear market bottom last October. We counted only 23.1% bulls at the second November low. The final March index low showed 26.4% bulls for a divergence that told us the bottoming action was complete.

The bears rose to 24.1% from 19.8% the previous week (a 34.6% decline from their highest level in the bear market, shown last October at 54.4%). The November and March bear counts were 49.5% and 47.2%.

Most of the new bears shifted from the correction camp, which ended at 25.3% from 28.6% a week ago. This group often appears to be 'hedging their bets' and is an intermediary's stop on the way from bearish to bullish or vice versa. Following the event a 'correction' advisory can usually say he was almost correct in his outlook.

We continue to rate the sentiment as bearish. The recent and current optimism means the advisors have been recommending equities to their readers who shouldn't have a lot of cash left on the sidelines (assuming they've been following the advisors view). Negative sentiment doesn't always means a sharp, immediate market drop, but it is a sign of elevated risk. Close attention is needed to preserve gains.

The difference between the bulls and bears narrowed to 26.5%, down from 31.8% last week. That is a small improvement but those readings are also typical of market tops.

COPPER

SOLF 60MIN

RIMM 60MIN

SENTIMENT NUMBERS

The advisors reacted quickly to the markets fast recovery from the one-day sell off on August 17. Last week we noted some modest calls for corrective trading after the sharp July and August advance that extended the strong rally from the March bottom. They described the conditions as extremely overbought and noted that the end of the recession might not be proceeding as planned. However, with averages heading back to their highs, the editors expressed renewed optimism with the latest sentiment readings.

The bulls jumped 3.3% to 51.6%, from 48.3% the previous week. That was above their recent peak of two weeks ago and their highest level since December 2007 when they were retreating from the 62.0% at that October's record market high.

The bears fell by the same amount to register 19.8%, dropping from the 23.1% in last weeks report. That was the fewest negative advisors since October 2007 when they numbered just 19.6%.

Advisors classified as correction were steady at 28.6%. Their number holds above the bears for the fourth week in a row, and now by a margin of almost 10%. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift to correction before they take a more definite stance.

Sentiment is clearly negative with readings similar to those shown at the end of 2007. The markets reached all-time highs that October and were just starting to retreat from there by the end of the year. That reminds us that the current sentiment doesn't mean an imminent market collapse. It does strongly suggest averages are close to their highs for the current move and much of the 'easy' gains have occurred.

The difference between the bulls and bears was +31.8, expanding to the widest positive margin since late 2007. The spread moves deeper into negative territory at +20 and higher.

SPX 15min

QQQQ

UUP

VALE 60 MIN

BULL BEAR MARKET..... TAKE YOUR OWN CONCLUSION WHERE WE ARE

Earlier this week, a friend asked me if I thought this stock bear was over. My first thought was “which bear?”, for there isn’t just one. The stock-market action over the last couple years has been a tale of two bears. Investors who’ve failed to understand this critical truth are very confused on what to expect from stocks going forward.



Earlier this week, a friend asked me if I thought this stock bear was over. My first thought was “which bear?”, for there isn’t just one. The stock-market action over the last couple years has been a tale of two bears. Investors who’ve failed to understand this critical truth are very confused on what to expect from stocks going forward.

You’ve certainly heard both sides of the bear argument. The bulls say of course the bear is over, the S&P 500 (SPX) has rallied 40% since March and 20%+ is officially bull territory. But the bears claim those lows won’t hold, that a retest is coming due to the slow economy and valuations remaining too high for a classic bear bottom in early March. Who is right? Both and neither at the same time!

The key to understanding stock-bear cycles is to realize that there are a pair of concurrent cycles, a tale of two bears. They operate like those Russian Matryoshka nesting dolls, a smaller bear cycle existing within a larger bear cycle. The larger bear cycle is measured in decades, while the smaller one nesting within is measured in years. The larger bears are known as secular bears while the smaller ones are cyclical bears.

Making this secular/cyclical distinction is absolutely crucial when using the word “bear”. If the type of bear being discussed is not explicitly specified, confusion is the inevitable result. And confusion invariably leads to poor investing decisions and loss of capital, both in a literal sense and in the opportunity-cost sense. So we need to start by defining each type of bear.

The word “secular” means long periods of time, and indeed the secular bear is well-deserving of this moniker. Throughout history, secular bears have had average durations of 17 years each! These great bears follow great bulls, which also happen to average 17 years. One complete secular-bull-to-secular-bear cycle runs 34 years, a third of a century. I highly encourage you to read my latest Long Valuation Waves essay if you are not familiar with these great stock-market cycles. They are crucial to understand.

Meanwhile the smaller cyclical bears are much shorter and occur within secular bulls and secular bears alike. Typically a cyclical bear will average a couple years in duration. While secular bears are driven by valuations, cyclical bears are usually driven by sentiment. The former start at very overvalued levels, while the latter start at very overbought levels. This distinction may seem subtle, but it is important.

Our current secular bear started back in early 2000 because stock valuations were extreme. The US stock markets were trading at staggering prices relative to the underlying profits of the corporations the stocks represented. While the long-term average price-to-earnings ratio of the general stock markets is 14x (14 times), as this secular bear dawned the SPX was nearly triple that at 44x! This disconnect had to be addressed.

And the 17-year secular bear is the naturally-occurring market mechanism that remedies extreme overvaluation. Stocks don’t fall for 17 years, but grind sideways for 17 years. This gives earnings time to slowly catch up with the high stock prices. As discussed in depth in my LVW research, this secular bear won’t end until stocks reach deeply undervalued levels (7x earnings, half the average) out in 2016 or so.

So from a valuation perspective, today’s secular bear is indeed only half over. Over the next 8 years, the stock markets are very unlikely to get materially higher than their early 2000 and late 2007 levels at best. This is around 1550 on the SPX. Investors are indeed wise and prudent to respect this secular bear and trade accordingly. But an overarching 17-year sideways grind certainly doesn’t mean they should totally avoid stocks in a secular bear.

We mortal humans really don’t live very long. And our useful investing lifespan is considerably shorter than our natural ones. To invest, first surplus income has to be generated. For most people this starts happening a few years after college, say at 25 years old. Investment can continue as long as someone can live below their means and keep plowing surplus income into the markets. But once retirement arrives, say at 65, working income stops so investments must then be gradually sold to finance life.

With an average investing lifespan of just 40 years, investors can’t afford to let their surplus labors sit in idle cash for 17 years. This is especially true in the Fed’s fiat-currency regime where dollar inflation is constantly eroding our saved purchasing power. Thus a good steward of his assets invests all the time, not just when the sun is shining. While it is much harder in a secular bear, investing can still bear great fruit.

And this is where cyclical bulls and bears come in. Within the 17-year secular trends, every few years or so the short-term trend changes from bull to bear or back. These cyclical swings can be wildly profitable. Within a secular bear for example, a cyclical bull often leads to a 100% gain in a few years or so. Then the subsequent cyclical bear often leads to a 50% loss over a similar span. These big moves are very tradable.

This first chart illuminates the stock-bear cycles by examining our current secular bear compared to the last one that straddled the 1970s. Within both secular bears, 17-year sideways grinds, major cyclical bulls and cyclical bears erupted. The secular bears form giant sideways trading ranges while the cyclical bulls and bears meander back and forth within these ranges. Investors need to understand this behavior.



The red line follows the S&P 500 during the infamous secular bear from 1966 to 1982. Note that even though stocks simply traded sideways on balance over this 17-year span, it wasn’t randomly. Multi-year cyclical bulls and bears emerged that were quite tradable by investors and speculators alike. They could buy low near the bottom of the secular trend and sell high a few years later near the top. And instead of just sitting out cyclical bears the speculators could actively short them, as we’ve done at Zeal.

We’ve seen similar behavior in our current secular bear, the blue line. Since 2000, the stock markets have just ground sideways on balance. Yet within this giant secular trading range mighty cyclical bulls and bears have emerged. From March 2000 to October 2002, the SPX fell 49% in a cyclical bear. But out of those oversold depths a new cyclical bull emerged that carried this index 102% higher by October 2007.

Yet even after such a strong cyclical bull, the SPX couldn’t materially exceed its 2000 highs since it is stuck in a secular-bear trading range. So from its late 2007 heights another cyclical bear emerged. This one dragged the SPX down 57% by March 2009, once again carrying it to the bottom of its secular trading range. These doublings in cyclical bulls followed by halvings in cyclical bears are common within secular bears, as these are the exact magnitudes of swings that keep the giant secular trading range intact.

As I argued right in the darkest days of the stock panic back in November, the SPX being near its secular support strongly suggested a new stock bull was being born. Why? This is how secular bears work. They are not 17 years of falling prices, but 17 years of sideways grinding punctuated by a serpentine meandering cyclical-bull-then-cyclical-bear cycle. Companies and stock markets don’t cease to exist just because people are scared, life and the economy always march on.

One of the primary arguments against the new-cyclical-bull-within-secular-bear thesis at both the November and March lows was valuations. How could the stock bear be over when valuations were well above the 7x earnings classic bear-low metric? This really amused me, as I have been studying valuations since 2001 when I predicted this secular bear. All of a sudden 7 years later, valuation studies became the new rage. Yet sadly they were superficial and usually misinterpreted.

This next chart explores valuations in secular bears by zooming in to the same span shown above and noting the SPX P/E ratios at key turning points. If you carefully study this chart, it utterly shatters the popular notion among traders today that a stock bear can’t end until we see 7x earnings. While a secular bear won’t end until such low valuations are seen, cyclical bears can end regardless of where valuations happen to be because valuations are not what drive these cyclical moves within secular trends.



In the last secular bear that ended in 1982, general stock valuations did indeed fall under a P/E ratio of 7x earnings. But it didn’t happen until 17 years in! In October 1966, the SPX bottomed at 18.8x earnings and then rallied 48% by November 1968. In May 1970 the SPX bottomed again at 13.8x earnings, still way above the 7x metric. Yet out of those “overvalued” lows a strong 74% cyclical bull emerged that ran until January 1973. And this pattern goes on and on if you follow the red line above.

The key point is that cyclical-bear bottoms within secular bears don’t require any certain P/E-ratio level. That is a misleading myth propagated by sloppy analysts too lazy to actually study market history. Cyclical bears bottom when stocks get too oversold near the bottom of their secular-bear trading range, it has nothing to do with valuations. The best example of this ironclad truth is from our current secular bear.

Back in October 2002, the SPX was down 49% in its first brutal cyclical bear of this secular bear. Trading near 775, it wasn’t much higher than we saw during the recent stock panic. It was this late 2002 low that established the secular trading range that the SPX has largely stuck to ever since. But note that at those 2002 lows, the stock markets were still trading at 25.5x earnings. These are very high valuations, almost into classical bubble territory of 28x (twice 14x fair value)! Yet the next cyclical bull was still born.

Between October 9th, 2002 and October 9th, 2007, the SPX blasted 102% higher in one of the longest cyclical bulls I’ve ever come across. Yet after this run, after more than doubling in exactly 5 years, the valuations at the late 2007 top (21.3x) were substantially lower than at the late 2002 bottom. This is about 1/6th lower even though the SPX was over twice as high! This illustrates an extremely important point.

Time is the primary weapon secular bears use to revert prevailing valuations back from very overvalued levels at the start of the secular bear to very undervalued levels at its end. As the years pass by, corporate earnings naturally grow. And since stock prices are trading sideways on balance, the P/E ratios naturally gradually contract. Like a child growing into shoes that are still too large, earnings grow into prevailing stock prices. Big cyclical bulls and bears within secular bears do not short-circuit this overriding strategic valuation-mean-reversion trend.

The farther you progress into a secular bear, the more valuations moderate at both cyclical tops and bottoms. If you look at the peak-to-peak or trough-to-trough P/E-ratio comparisons above, in either secular bear, you will note they are always contracting over years. But at any given cyclical top or bottom, they can be anywhere. Like stock prices, earnings are in constant flux over the short term which leads to occasional valuation anomalies. But over time, the secular bear will force P/E-ratio contraction.

Realize that today’s bearish arguments stating that 7x earnings wasn’t hit in March, so therefore today’s stock markets can’t be in a new bull, are totally specious. Anyone advancing this 7x thesis does not understand stock bears and has not studied them. Major and very profitable cyclical bulls can erupt within secular bears from all kinds of valuation levels. 7x earnings are not seen until the very end of a secular bear!

Out of extremely oversold (a function of sentiment, not valuation) lows, near the bottom of the secular-bear trading range, massive cyclical bulls erupt. Prudent investors can ride these to 100%+ gains in the general stock markets and much bigger gains in sectors outperforming fundamentally like commodities stocks. Despite remaining in a secular bear today, we are due for a huge cyclical bull that should run for several years or so. Valuations are irrelevant for this already-underway surge higher.

To get a better understanding of the kinds of speed and magnitude a young cyclical bull can command out of the bottom of a secular trading range, consider the 1974 and 1975 example. This next chart zooms in to the early 1970s and compares it to the matching years in our current secular bear. Occurring at the exact same point in two separate secular bears separated by an entire 34-year LVW cycle, the similarities between 2008 and 1974 are uncanny.

While 2008 was the first full-blown stock panic in 101 years, 1974 was certainly no picnic. Instead of plunging 27.1% in less than 4 weeks like the SPX did in October 2008 at the worst stage of our recent panic, the SPX plunged 24.6% in 8 weeks leading into October 1974. That selloff wasn’t quite at panic-type speeds, but it was certainly of panic-type magnitudes. Investors were terrified in late 1974 just like they were in late 2008.

And the economy wasn’t looking so hot then either. Today investors worry about a simple mean-reversion in house prices from bubble-like highs, but back then there were gasoline lines and rationing. The Arabs were using oil as a weapon to try and punish Americans for US support of Israel after Egypt and Syria simultaneously invaded it to try and wipe out the Jews. In 1974, headline CPI inflation ran 12.3%! In the first quarter of 1975, the US economy contracted at a sharp 4.8% annual rate. Things were a mess.

Despite these huge economic problems that were far more disruptive than today’s credit crunch, the stock markets still rallied out of those deeply oversold October 1974 lows. By July 1975, the SPX was already up 54%. And by September 1976, this cyclical bull within a secular bear had carried it 73% higher. And as you can see above, the sharp initial ascent of this cyclical bull in its first 9 months or so was virtually identical to what we’ve seen in the SPX since March 2009. Cyclical bulls within secular bears are awesome beasts!

And provocatively, this particular cyclical bull we’ve entered today has much greater potential than the one that erupted after the near-panic in 1974. The biggest up years ever witnessed in stock-market history happen immediately after the biggest down years. While 1974 was down 30%, 1975 rallied 32%. And 2008’s 38.5% SPX decline was the biggest calendar-year plunge in this index’s entire history. So over a century of stock-market history spanning panics and a depression strongly argues that 2009 is going to be a huge up year. This post-panic reversion force will probably make this cyclical bull much bigger and faster than normal.

As in 1975, the state of the economy today is largely irrelevant for this unfolding stock bull. Stocks are not rallying because they are fundamentally cheap, nor because the economy is improving. They are rallying simply because they were far too radically oversold in the stock panic. The SPX near 750 in late November or 675 in early March was handicapping the end of the world, yet that obviously didn’t come to pass. So stocks have to be bid back up to reasonable levels reflecting a severe recession, not a depression. And of course sentiment has to be rebalanced away from the extreme fear of the panic.

The secular bear that started in 2000 is indeed alive and well. We are only about halfway through its 17-year span. Still, coming out of the bottom of its secular trading range a mighty cyclical bull has erupted. This should lead to a 100%+ total gain in the SPX over the coming years. There is absolutely no contradiction in this cyclical-bull-within-a-secular-bear worldview. It is coherent, logical, and historically sound.

At Zeal we have been actively trading this thesis since the stock panic, to big gains. As I mentioned last week in my latest controversial inflation essay, our new long-term investments added in the heart of the stock panic already have average unrealized gains over 100%. Our 29 open post-panic stock trades in our monthly and weekly subscription newsletters now have average unrealized gains approaching 50%. The opportunities are vast early in this cyclical bull. Can you afford to miss them after the panic, to let inflation ravage your cash and your future lifestyle?

As zealous students of the markets, we are dedicated to relentlessly studying them and applying this research to recommending high-potential investments and speculations to our subscribers who support our work. We called that latest brutal cyclical stock bear in January 2008 when the SPX was at 1350. We called this new cyclical stock bull in November 2008 in the heart of the panic. If you want to grow your knowledge of the markets, and profit greatly from it, subscribe today!

The bottom line is there are two types of bears, secular and cyclical. While we are only halfway through a 17-year secular bear, the last cyclical bear just gave up its ghost in early March. It wasn’t an undervaluation that signaled this end, as that classic 7x earnings standard only applies to secular bears. It was the extreme oversoldness and extreme fear, which weren’t sustainable. Stocks were simply driven too low in the panic.

And they are due to rally greatly because of this oversold anomaly. A new cyclical bull has been born. There is no contradiction at all in being long stocks during a cyclical bull within a secular bear. It is actually the most prudent course for growing capital. But sadly only the investors and speculators who take the time to learn about stock-bear cycles will be able to capitalize on these awesome opportunities.