The Dow goes Pow
Dow Transports, Dow Industrials; MetaStock chart
In the grander scheme of things, I regard this new downtrend as the resumption of the process that began back in 2000. As I argued most recently in June's edition of the , we have been in a long-term bear market for the past decade, albeit one punctuated by spectacular bear-market rallies, such as that of 2003-07 and 2009-10. Until last week, though, I thought the markets would exceed their April highs before the downtrend resumed. I no longer hold that view.
So, how far will the downtrend take us and over what period? The most optimistic view is that it will turn out to be the barest of bear markets. I referred on to a Morgan Stanley view that the sell-off was like that of 1998, where the market plunged by a quarter in 56 days, before galloping on to new highs in short order. But I balk at comparing 1998 to the present. Back then, we were still in a long-term bull market. Today, we are in a long-term bear market.
That's sooo last decade...
S&P 500
At the very least, I believe the US and UK markets will ultimately revisit their lows of 2003 and 2009. In all probability, I see them going well through those levels - see the for more detail on this. According to my cycle projections, the larger downtrend is likely to persist into late 2012. As things stand today, the most persistent selling could come in late 2011 and early 2012, when all of the S&P's long-term cycles will be in their down-phases.
As with any bear-market, we should not expect one-way traffic. Dramatic rallies will occur along the way. While short-selling will naturally offer the best opportunities overall, I will certainly be ready to play the market from the long side at strategic moments. But I obviously do not expect buy-and-hold investing to prosper in this environment. I sold my personal FTSE 100 holdings earlier this year and switched into gilts. This has paid off so far.
What of my call for a decent rally starting in July and running into August? I continue to believe this will happen, because that is what my cycle-projection suggests. The only difference is that I do not think the bounce will take us above April's highs. It could still be strong, however. I will be quite happy to open a long position if a suitable opportunity arrives on schedule.
The sell-off to Monday, 5 July left the FTSE 100, S&P 500 and Nasdaq 100 as oversold as they were at the start of the rallies of May and June. The sort of sharp bounce that we saw on the morning of Tuesday, 6 July is not surprising, therefore. While this could mark the start of the bigger rally I expect, I don't think it does. My preferred scenario is strength to around 9 July and then a further dip to around 19 July before a bigger rebound begins.
This suggests two possible strategies in the near future. In the first place, I could short the S&P 500 if it reverses around 9 July. But I would be more enthusiastic about going long of that index a week or so later, if the bottom I expect materialises. Were it accompanied by positive divergence, so much the better.
Is this wise, considering that I now reckon we are in a bear market? On the whole, I believe in trading in the same direction as the larger trend. If the opportunity looks good enough, though, I can allow myself to break this, as long as I run a tight stop-loss.
You can see my commentary on the latest swing-charts online.
