Start of A Stock Market Rally Into Spring 2013?

26 Nov

Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.

This is a tricky situation. On the one hand, stocks are oversold and due for a bounce.  On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.

The bullish case is bolstered by this weeks positive results, which stopped the previous declines.  The market’s previous fall of 8.8% from the September high is right around the normal bull market correction.  So, the reversal clue materialized right where it theoretically should have.

The bearish case:  There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining  and still not snap the losing streak ( as compared to September’s highs).

Any additional clues from the CBOE Volatility Index?  No, not really.

Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling.  Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point.  Then again, the VIX is clearly hitting a ceiling at its 52-week moving average.  Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).

So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed? 

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.

The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.

If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.

We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.

As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.

This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.

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